MP MATERIALS CORP.
The following discussion and analysis of financial condition, results of
operations, liquidity and capital resources should be read in conjunction with,
and is qualified in its entirety by, the unaudited Condensed Consolidated
Financial Statements and the notes thereto included in this Quarterly Report on
Form 10-Q ("Form 10-Q"), and the Consolidated Financial Statements and notes
thereto and Management's Discussion and Analysis of Financial Condition and
Results of Operations contained in the Annual Report on Form 10-K ("Form 10-K")
for the year ended December 31, 2020 . This discussion and analysis contains
forward-looking statements that involve risks, uncertainties and assumptions.
The actual results may differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including, but not
limited to, those set forth under "Part II. Item 1A. Risk Factors" and
elsewhere in this Form 10-Q and "Part I. Item 1A. Risk Factors" and elsewhere in
our Form 10-K. In addition, see "Cautionary Note Regarding Forward-Looking
Statements." References herein to the "Company," "we," "our," and "us," refer
to MP Materials Corp. and its subsidiaries.
Overview
We own and operate the Mountain Pass Rare Earth Mine and Processing Facility
("Mountain Pass "), an iconic American industrial asset, which is the only rare
earth mining and processing site of scale in the Western Hemisphere and
currently produces approximately 15% of global rare earth content.
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 . We
acquired the Mountain Pass assets in 2017, restarted operations from cold-idle
status and embarked on a deliberate, two-stage plan to optimize the facility and
position the Company for growth and profitability. We commenced mining,
comminution, beneficiation, and tailings management operations, which we
designated Stage I of our multi-stage optimization plan, between December 2017
and February 2018 . We currently produce a rare earth concentrate that we sell to
Shenghe Resources (Singapore) International Trading Pte. Ltd. ("Shenghe"), an
affiliate of Shenghe Resources Holding Co., Ltd., a leading global rare earth
company that is publicly listed in China , which, in turn, sells that product to
end customers in China . These customers separate the constituent REE contained
in our concentrate and sell the separated products to various end users. We
believe our concentrate represented approximately 15% of the rare earth content
consumed in the global market in 2020. 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 anticipated global growth in demand for REO,
we also believe global economic trends, geopolitical realities and
sustainability mandates are combining to further support an opportunity for us
to create shareholder value. We believe businesses are increasingly prioritizing
diversification and security of their global supply chains so as to reduce
reliance on a single producer or region for critical supplies. This trend also
has national security implications, as illustrated by a recent U.S. Presidential
executive order requiring the U.S. government to review supply chains for
critical minerals and other identified strategic materials, including rare earth
elements, in an effort to ensure that the U.S. is not reliant on other
countries, such as China . According to the CRU Group , China accounted for
approximately 79% of global REO production in 2020. We believe an even higher
percentage of the NdPr magnet supply chain is based in China . Finally, public
and private interests are increasingly demanding sustainability throughout
production value chains to limit negative environmental and societal impacts
from business activity, including pollution and acceleration of climate change.
As the only scaled source in North America for critical rare earths, with a
processing facility designed to operate with best-in-class sustainability and a
competitive cost structure, we believe we are well-positioned to thrive in a
transforming global economy.
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Recent Developments and Comparability of Results
Business Combination and Reverse Recapitalization
The Business Combination (as defined below) was consummated on November 17,
2020 , pursuant to the terms of a merger agreement entered into on July 15, 2020
(the "Merger Agreement"). Pursuant to the Merger Agreement, MP Mine Operations
LLC ("MPMO") and Secure Natural Resources LLC ("SNR"), the company that holds
the mineral rights to the Mountain Pass mine and surrounding areas as well as
intellectual property rights related to the processing and development of rare
earth minerals, were combined with Fortress Value Acquisition Corp. ("FVAC"), a
special purpose acquisition company (the "Business Combination"), and became
indirect wholly-owned subsidiaries of FVAC, which was in turn renamed MP
Materials Corp. The Business Combination was accounted for as a reverse
recapitalization, with no goodwill or other intangible assets recorded, and the
acquisition of SNR (the "SNR Mineral Rights Acquisition") was treated as an
asset acquisition. Furthermore, MPMO was deemed to be the accounting acquirer
and FVAC the accounting acquiree, which, for financial reporting purposes,
results in MPMO's historical financial information becoming that of the Company.
Our Relationship and Agreements with Shenghe
Original Commercial Agreements
In May 2017 , prior to our acquisition of the Mountain Pass facility, we entered
into a set of commercial arrangements with Shenghe, which principally consisted
of a technical services agreement (the "TSA"), an offtake agreement (the
"Original Offtake Agreement"), and a distribution and marketing agreement (the
"DMA"). Shenghe and its affiliates primarily engage in the mining, separation,
processing and distribution of rare earth products. We also issued to Leshan
Shenghe Rare Earth Co., Ltd. ("Leshan Shenghe"), the majority stockholder of
Shenghe, a preferred interest in the Company, which was ultimately exchanged for
shares of our common stock in connection with the Business Combination.
The Original Offtake Agreement required Shenghe to advance us an initial
$50.0 million (the "Initial Prepayment Amount") to fund the restart of
operations at the mine and the TSA required Shenghe to fund any additional
operating and capital expenditures required to bring the Mountain Pass facility
to full operability. Shenghe also agreed to provide additional funding in the
amount of $30.0 million to the Company pursuant to a separate letter agreement
dated June 20, 2017 (the "Letter Agreement") (the "First Additional Advance"),
in connection with our acquisition of 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 ),
we 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 we repaid, and Shenghe recovered, such amounts
(the "Gross Profit Recoupment"). Under the Original Offtake Agreement, we were
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 the Company and Shenghe, subject to certain agreed
exceptions. We retained the right to distribute our products directly to certain
categories of customers. As compensation for Shenghe's distribution and
marketing services, the DMA entitled Shenghe to a portion of the net profits
from the sale of rare earth products produced at the Mountain Pass facility. See
below for further discussion of the DMA termination and associated accounting
treatment.
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Framework Agreement and Restructured Commercial Agreements
In May 2020 , the Company entered into a framework agreement and amendment (the
"Framework Agreement") with Shenghe and Leshan Shenghe that significantly
restructured the commercial arrangements and provided for, among other things, a
revised funding amount and schedule to settle Shenghe's prepayment obligations
to the Company, as well as either the amendment or termination of the various
agreements between the parties, as discussed below.
Pursuant to the Framework Agreement, we entered into an amended and restated
offtake agreement with Shenghe on May 19, 2020 (the "A&R Offtake Agreement"),
which, upon effectiveness, superseded and replaced the Original Offtake
Agreement, and we issued to Shenghe a warrant on June 2, 2020 (the "Shenghe
Warrant"). Pursuant to the Framework Agreement, Shenghe funded the remaining
portion of the Initial Prepayment Amount and agreed to fund an additional
$35.5 million advance to us (the "Second Additional Advance" and together with
the Initial Prepayment Amount, inclusive of the $30.0 million increase pursuant
to the Letter Agreement, the "Offtake Advances"), which amounts were fully
funded on June 5, 2020 . The Shenghe Warrant was ultimately exchanged for shares
of our common stock in connection with the Business Combination.
Upon the funding of the remaining obligations on June 5, 2020 , among other
things, (i) the TSA and the DMA were terminated (as described below) and (ii)
the A&R Offtake Agreement and the Shenghe Warrant became effective (such events
are collectively referred to as the "June 2020 Modification"). Thus, at the
present time, Leshan Shenghe's and Shenghe's involvement with the Company and
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 the Company and Shenghe. As
with the Original Offtake Agreement, the A&R Offtake Agreement will terminate
when Shenghe has fully recouped all of its prepayment funding. Following that
termination, the Company will have no contractual arrangements with Shenghe for
the distribution, marketing or sale of rare earth products.
Accounting 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 3, "Relationship and Agreements with
Shenghe," in the notes to the unaudited Condensed Consolidated Financial
Statements, based on the relationship between (i) the deemed proceeds the
Company would ultimately receive from the Initial Prepayment Amount (adjusted
for (a) the fair value of the preferred interest provided to Shenghe at the time
of entering into the aforementioned commercial arrangements and (b) the fair
value allocated to the modification to the revenue arrangement) and (ii) the
contractual amount owed to Shenghe (i.e., the Prepaid Balance, which included
the Initial Prepayment Amount and the additional $30.0 million adjustment to the
Prepaid Balance in connection with the Letter Agreement) at the time, the June
2017 Modification resulted in an implied discount of 36% on the Company's sales
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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 products
by the General Administration of Customs of the People's Republic of China
during this period. See also "Key Performance Indicators" section.
In addition, sales to Shenghe under the Original Offtake Agreement between July
2019 and early June 2020 typically provided Shenghe with a discount generally in
the amount of between 3% and 6% of the initial cash price of our rare earth
products sold in consideration of Shenghe's sales efforts to resell our rare
earth products (the "Shenghe Sales Discount"). The Shenghe Sales Discount was
considered a reduction in the transaction price; thus, was not recognized as
revenue. Additionally, the Shenghe Sales Discount was not applied to reduce the
Prepaid Balance; however, it was considered as part of Shenghe's cost of
acquiring our product in the calculation of Shenghe's gross profit.
Accounting 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 June 2020 Modification, the amount of revenue we recorded for
periods that included any portion of the period from July 1, 2019 , until June 5,
2020 , is not comparable, in the aggregate or on a per unit basis, to the amount
of revenue recorded in other periods that commenced after June 5, 2020 .
Furthermore, assuming static market prices, we would expect to record more
revenue per REO MT sold subsequent to June 5, 2020. See also "Key Performance
Indicators" section.
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Tariff-Related Rebates
Starting in May 2020 , the government of the People's Republic of China granted
retroactive tariff relief to certain importers of rare earth minerals including
Shenghe and its affiliates and other consignees of our products, relating to
periods prior to the formal lifting of the tariffs. As a result, Shenghe's
actual realized prices for the REO sold prior to May 2020 were higher than
originally reported to us and resulted in tariff rebates to end customers, which
contractually were due to Shenghe. On account of these rebates in the second and
third quarters of 2020 and the first quarter of 2021, we received from Shenghe
certain credits against our contractual commitments to them.
Impact of the COVID-19 Pandemic
In December 2019 , a novel strain of coronavirus (known as "COVID-19") began to
impact the population of China , where our principal customer is located. The
outbreak of COVID-19 has grown both in the United States and globally, and
related government and private sector responsive actions have adversely affected
the global economy. In December 2019 , a series of emergency quarantine measures
taken by the Chinese government disrupted domestic business activities in China
during the weeks after the initial outbreak of COVID-19. These disruptions have
occurred periodically since the start of COVID-19 outbreak as measures intended
to impede the spread of the virus have adapted. Since the initial COVID-19
outbreak, many countries, including the United States , have imposed restrictions
on travel to and from China and elsewhere, as well as general movement
restrictions, business closures and other measures imposed to slow the spread of
COVID-19.
At the onset of the outbreak, we initially experienced shipping delays due to
overseas port slowdowns and container shortages, but we did not experience a
reduction in production or sales. However, beginning in the fourth quarter of
2020, and continuing through the second quarter of 2021, we again saw 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. Our calculations of these performance indicators may differ from
similarly-titled measures presented by other companies in our industry or in
other industries. The following table presents our key performance indicators:
For the three months ended For the six months ended June
June 30, Change 30, Change
(in whole units or dollars,
except percentages) 2021 2020 $ % 2021 2020 $ %
REO production volume (MTs) 10,305 9,287 1,018 11 % 20,154 18,969 1,185 6 %
REO sales volume (MTs) 9,877 10,297 (420) (4) % 19,670 18,618 1,052 6 %
Realized price per REO MT $ 7,343 $ 3,093 $ 4,250 137 % $ 6,620 $ 2,848 $ 3,772 132 %
Production cost per REO MT $ 1,538 $ 1,412 $ 126 9 % $ 1,507 $ 1,362 $ 145 11 %
REO Production Volume
We measure our REO-equivalent production volume for a given period in metric
tons, our principal unit of sale. This measure refers to the REO content
contained in the rare earth concentrate we produce. Our REO production volume is
a key indicator of our mining and processing capacity and efficiency.
The rare earth concentrate we currently produce is a processed, concentrated
form of our mined rare earth-bearing ores. While our unit of production and sale
is a MT of embedded REO, the actual weight of our rare earth concentrate is
significantly greater, as the concentrate also contains non-REO minerals and
water. We target REO content of greater than 60% per dry MT of concentrate
(referred to as "REO grade"). The elemental distribution of REO in our
concentrate is relatively consistent over time and production lot. We consider
this the natural distribution, as it reflects the distribution of elements
contained, on average, in our ore. Upon the completion of our Stage II
optimization project, we expect to refine our rare earth concentrate to
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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.
Realized Price per REO MT
We calculate the realized price per REO MT for a given period as the quotient
of: (i) our Total Value Realized (see below) for a given period and (ii) our REO
sales volume for the same period. We define Total Value Realized, which is a
non-GAAP financial measure, as our product sales adjusted for (x) the revenue
impact of tariff-related rebates from Shenghe on account of prior sales, (y) in
connection with our sales of REO to Shenghe between July 1, 2019 , and June 5,
2020 , the Shenghe Implied Discount, and (z) sales of legacy stockpiles and other
revenues. The Shenghe Implied Discount is equal to the difference between
(i) Shenghe's average realized price, net of taxes, tariffs and certain other
agreed-upon charges (such as one-time demurrage charges) on our products once
sold to their ultimate customers and (ii) the amount of revenue we recognized on
the sales of those products to Shenghe for sales between July 1, 2019 , and June
5, 2020 , which includes the non-cash portion discussed above.
Under the terms of the Original Offtake Agreement, for the period between
July 1, 2019 , and June 5, 2020 , Shenghe purchased our rare earth products at an
agreed-upon 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. See also "Recent Developments and Comparability of
Results" section above.
Realized price per REO MT is an important measure of the market price of our
product. Accordingly, we calculate realized price per REO MT to reflect a
consistent basis between periods by eliminating the impact of recognizing
revenue at a discount during the period between July 1, 2019 , and June 5, 2020 ,
and the revenue impact of tariff-related rebates. See the "Non-GAAP Financial
Measures" section below for a reconciliation of our Total Value Realized,
which is a non-GAAP financial measure, to our product sales, which is determined
in accordance with GAAP, as well as the calculation of realized price per REO
MT.
Production Cost per REO MT
We calculate the production cost per REO MT for a given period as the quotient
of: (i) our Production Costs (see below) for a given period and (ii) our REO
sales volume for the same period. We define Production Costs, which is a
non-GAAP financial measure, as our cost of sales (excluding depletion,
depreciation and amortization) less costs attributable to sales of legacy
stockpiles, stock-based compensation expense included in cost of sales (as
opposed to general and administrative), 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
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defense applications (e.g., guidance and control systems, global positioning
systems, radar and sonar, drones, etc.); and essential industrial infrastructure
(e.g., advanced catalyst applications in oil refining and pollution-control
systems in traditional internal-combustion automobiles, etc.). We believe these
drivers will fuel the continued growth of the rare earth market, particularly
the market for NdPr.
We believe we benefit from several demand tailwinds for REE, and particularly
for NdPr. These include the trend toward geographic supply chain
diversification, particularly in relation to China , which accounted for
approximately 79% of global REE production in 2020, the U.S. government strategy
to restore domestic supply of key minerals, and increasing acceptance of
environmental, social and governance mandates, which impact global capital
allocation throughout production value chains to limit negative environmental
and societal impacts. However, changes in technology may also drive down the use
of REE, including NdPr, in the components in which they are now used, or lead to
a decline in reliance on such components altogether. We also operate in a
competitive industry, and many of our key competitors are based in China , where
production costs are typically lower than in the United States .
Our Mineral Reserves
Our ore body has proven over more than 60 years of operations to be one of the
world's largest and highest-grade rare earth resources. As of July 1, 2020 , SRK
Consulting (U.S.), Inc. , an independent consulting firm that we have retained to
assess our reserves, estimates total proven and probable reserves of 1.5 million
short tons of REO contained in 21.1 million short tons of ore at Mountain Pass ,
with an average ore grade of 7.06%. These estimates use an estimated economical
cut-off of 3.83% total REO. Based on these estimated reserves and our expected
annual production rate of REO upon completion of our Stage II optimization
project, our expected mine life is approximately 24 years. We expect to be able
to significantly grow our expected mine life through exploratory drilling
programs and incorporation of the profitability uplift of our Stage II
optimization project over time.
Mining activities in the United States are heavily regulated, particularly in
California . Regulatory changes may make it more challenging for us to access our
reserves. In addition, new mineral deposits may be discovered elsewhere, which
could make our operations less competitive.
Maximizing Production Efficiency
In 2020, REO production was approximately 3.2x greater than the highest ever
production in a twelve-month period by the former operator using the same
capital equipment. We achieved these results through an optimized reagent
scheme, lower process temperatures, better management of the tailings facility,
and a commitment to operational excellence, driving approximately 95% uptime. We
also believe that our Stage I optimization initiatives enabled us to achieve
world-class production cost levels for rare earth concentrate. All of these
achievements enabled us to become operating cash flow positive, despite
significant Chinese trade tariffs on ore and concentrates in place over the
optimization period. These trade tariffs were recently suspended, further
enhancing the earnings power of our Stage I operations.
We believe that the success of our business will reflect our ability to manage
our costs. Our Stage II optimization 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,
construction and other recommissioning activities are underway and involve
upgrades and enhancements to the existing facility process flow to reliably
produce separated REE at a lower cost and with an expected smaller environmental
footprint per volume of REO produced than the prior operator of 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
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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 for the
Stage II optimization project is complete and we believe that our Stage II
optimization project investments will enable us to increase the recovery of NdPr
from our concentrate, increase NdPr production, and lower the cost of
production, in each case, as compared to the prior owner's operations. Upon 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.
Following the completion of our 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 and
profitability as the producer of a critical industrial output in addition to a
producer of resources. Geopolitical developments are creating an increased
urgency to bring critical rare earth mining and refining production capability
to the United States and to restore the full U.S. magnetics supply chain.
The completion of our Stage II optimization project and any development of Stage
III is expected to be capital intensive. During the first quarter of 2021, we
revised the scope of our Stage II optimization project to include process design
innovations that reduce reagent consumption by greater than 10% while increasing
the planned recovery of separated REO and improving potential product mix. We
continue to expect to be able to reach targeted production rates and
profitability in 2023 without the need to recommission our chlor-alkali
facility, which we previously estimated would cost approximately $30 million . We
believe this significantly reduces the operational risks in achieving our
targeted profitability. We continue to expect to invest a total of approximately
$220 million on our Stage II optimization project, principally in 2021 and 2022.
Our estimated costs or estimated time to completion may increase, potentially
significantly, due to factors outside of our control. While we believe we have
sufficient cash resources to fund our Stage II optimization 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.
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Results of Operations
Comparison of the Three and Six Months Ended June 30, 2021 and 2020
The following table summarizes our results of operations:
For the three months ended June For the six months ended June
30, Change 30, Change
(in thousands, except
percentages) 2021 2020 $ % 2021 2020 $ %
Product sales:
Product sales-Shenghe $ 72,136 $ 30,273 $ 41,863 138 % $ 131,875 $ 50,834 $ 81,041 159 %
Product sales-third parties 982 118 864 732 % 1,214 276 938 340 %
Total product sales 73,118 30,391 42,727 141 % 133,089 51,110 81,979 160 %
Operating costs and expenses:
Cost of sales(1) 17,955 16,865 1,090 6 % 35,891 29,532 6,359 22 %
Write-down of inventories 1,809 - 1,809 n.m. 1,809 - 1,809 n.m.
Royalty expense to SNR - 366 (366) (100) % - 853 (853) (100) %
General and administrative 13,631 5,843 7,788 133 % 27,214 8,927 18,287 205 %
Depreciation, depletion and
amortization 6,666 1,382 5,284 382 % 12,816 2,653 10,163 383 %
Accretion of asset retirement and
environmental obligations 592 564 28 5 % 1,185 1,128 57 5 %
Settlement charge - 66,615 (66,615) (100) % - 66,615 (66,615) (100) %
Total operating costs and
expenses 40,653 91,635 (50,982) (56) % 78,915 109,708 (30,793) (28) %
Operating income (loss) 32,465 (61,244) 93,709 n.m. 54,174 (58,598) 112,772 n.m.
Other income, net 3,504 155 3,349 2161 % 3,559 237 3,322 1402 %
Interest expense, net (2,639) (1,066) (1,573) 148 % (3,793) (1,869) (1,924) 103 %
Income (loss) before income taxes 33,330 (62,155) 95,485 n.m. 53,940 (60,230) 114,170 n.m.
Income tax expense (6,164) (336) (5,828) 1735 % (10,655) (336) (10,319) 3071 %
Net income (loss) $ 27,166 $ (62,491) $ 89,657 n.m. $ 43,285 $ (60,566) $ 103,851 n.m.
Adjusted Net Income $ 33,440 $ 4,898 $ 28,542 583 % $ 56,646 $ 7,485 $ 49,161 657 %
Adjusted EBITDA $ 46,447 $ 7,856 $ 38,591 491 % $ 79,447 $ 13,036 $ 66,411 509 %
n.m. - Not meaningful.
(1)Excludes depreciation, depletion and amortization.
Product sales, which consists primarily of our sales of REO concentrate to
Shenghe, increased year over year by $42.7 million , or 141%, to $73.1 million
for the three months ended June 30, 2021 . The increase was driven primarily by
higher realized price per REO MT, which increased by 137% year over year for the
three months ended June 30, 2021 , reflecting higher demand for rare earth
products. REO sales volume decreased by 420 MTs, or 4%, to 9,877 MTs for the
three months ended June 30, 2021 , as compared to the prior year period. REO
sales volume varies period-to-period based on the timing of shipments, but sales
volumes generally track our production volumes over time given our take-or-pay
arrangement with Shenghe. The increase in REO production volume for the three
months ended June 30, 2021 , as compared to the prior year period, reflects
continued improvement in the efficiency of our processing operations despite
slightly fewer production days. Product sales for the three months ended June
30, 2020 , were negatively impacted by the Shenghe Implied Discount, in which
$3.0 million of the value of products sold to Shenghe during the three months
ended June 30, 2020 , was not recognized as product sales. As mentioned above,
starting June 5, 2020 , the accounting treatment specific to the Shenghe Implied
Discount was no longer required. See the "Quarterly Performance Trend"
section below for further discussion on realized price per REO MT.
Product sales increased year over year by $82.0 million , or 160%, to $133.1
million for the six months ended June 30, 2021 . The increase was driven by
higher REO sales volume, which increased by 1,052 MTs, or 6%, to 19,670 MTs for
the six months ended June 30, 2021 , as compared to the prior year period, and a
higher realized price per REO MT, which increased by 132% year over year for the
six months ended June 30, 2021 , reflecting higher demand for rare earth
products. The increase in REO production volume for the six months ended
June 30, 2021 , as compared to the prior year period, reflects an improvement
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in the efficiency of our processing operations despite slightly fewer production
days. Product sales for the six months ended June 30, 2020 , were negatively
impacted by the Shenghe Implied Discount, in which $3.6 million of the value of
products sold to Shenghe during the six months ended June 30, 2020 , was not
recognized as product sales.
Cost of sales (excluding depreciation, depletion and amortization) consists of
production- and processing-related labor costs (including wages and salaries,
benefits, and bonuses), mining and processing supplies (such as reagents), parts
and labor for the maintenance of our mining fleet and processing facilities,
other facilities-related costs (such as property taxes and utilities), packaging
materials, and shipping and freight costs.
Cost of sales increased year over year by $1.1 million , or 6%, to $18.0 million
for the three months ended June 30, 2021 , due to an increase in production cost
per REO MT, offset slightly by a decrease in REO sales volume. The increase in
production cost per REO MT from $1,412 for the three months ended June 30, 2020 ,
to $1,538 for the three months ended June 30, 2021 , reflects higher payroll
costs primarily due to an increase in our employee headcount as we further
invest in our Stage II optimization project. In addition, production
efficiencies achieved during the three months ended June 30, 2021 , were largely
offset by higher material and supplies costs as well as COVID-19-impacted
freight-in costs.
Cost of sales increased year over year by $6.4 million , or 22%, to $35.9 million
for the six months ended June 30, 2021 . The increase was driven by higher sales
volume. The increase in production cost per REO MT from $1,362 for the six
months ended June 30, 2020 , to $1,507 for the six months ended June 30, 2021 ,
reflects higher material and supplies costs, partially driven by a temporary
reagent trial and COVID-19-impacted freight-in costs, as well as higher payroll
costs primarily due to an increase in our employee headcount as we further
invest in our Stage II optimization project. These cost increases offset
production efficiencies.
Notwithstanding an increase in employee headcount as we progress toward
completion of our Stage II optimization project, we believe our production cost
per REO MT has stabilized in the short-term, with operating efficiencies largely
offsetting raw material and logistics pressures. We anticipate additional
efficiency opportunities as we increase REO production volumes in our milling
and flotation circuit over time.
Write-down of inventories for the three and six months ended June 30, 2021 ,
includes a non-cash write-down of a portion of our legacy low-grade stockpile
inventory during the second quarter of 2021 after determining that the inventory
contained a significant amount of alluvial material that did not meet the
Company's requirement for mill feed and, as a result, was deemed unusable.
Royalty expense to SNR for the three and six months ended June 30, 2020 , related
to our prior obligation to pay SNR for the right to extract rare earth ores
contained in our mine and was based on 2.5% of product sales, subject to certain
minimums. Following the Business Combination, we do not incur royalty expenses
on a consolidated basis. See Note 17, "Related-Party Transactions," to our
unaudited Condensed Consolidated Financial Statements.
General and administrative expenses consist primarily of accounting, finance,
executive, and administrative personnel costs, including stock-based
compensation expense related to these personnel; professional services
(including legal, regulatory, audit and others); certain engineering expenses;
insurance, license and permit costs; facilities rent and other costs; office
supplies; general facilities expenses; certain environmental, health, and safety
expenses; gain or loss on sale or disposal of long-lived assets; and growth and
development costs.
General and administrative expenses increased year over year by $7.8 million , or
133%, to $13.6 million for the three months ended June 30, 2021 , reflecting $3.9
million in stock-based compensation expense primarily from grants of restricted
stock and restricted stock units ("Stock Awards") made during the fourth quarter
of 2020 related to the Business Combination. Prior to the fourth quarter of
2020, we had not granted any Stock Awards nor recorded any stock-based
compensation expense. Excluding this item, the increase was $3.9 million , or
67%, mainly due to increases in personnel costs, insurance costs, and legal
fees, which were incurred to support our operations as a public company as well
as our growth and development initiatives.
General and administrative expenses increased year over year by $18.3 million ,
or 205%, to $27.2 million for the six months ended June 30, 2021 , reflecting
$8.3 million in stock-based compensation expense primarily from grants of Stock
Awards made during the fourth quarter of 2020 related to the Business
Combination. Excluding this item, the increase was $10.0 million , or 112%,
mainly due to increases in personnel, professional service, and insurance costs
as well as legal fees, which were incurred to support our operations as a public
company as well as our growth and development initiatives.
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
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(prior to the adoption of Accounting Standards Update No. 2018-15).
Depreciation, depletion and amortization increased year over year by $5.3
million , or 382%, to $6.7 million for the three months ended June 30, 2021 , and
by $10.2 million , or 383%, to $12.8 million for the six months ended June 30,
2021 , reflecting the impact of additional equipment purchases, assets placed
into service, and depletion of the mineral rights resulting from the SNR Mineral
Rights Acquisition in November 2020 .
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,
respectively. Accretion of asset retirement and environmental obligation
remained relatively flat year over year.
Settlement charge of $66.6 million for the three and six months ended June 30,
2020 , which was non-cash, was recorded in connection with the termination of the
DMA. See also "Recent Developments and Comparability of Results" section
above.
Other income, net, consists primarily of gains or losses on extinguishment of
debt and interest income. Other income, net, increased year over year for the
three and six months ended June 30, 2021 , as a result of a non-cash gain
recognized during the second quarter of 2021 as a result of the Small Business
Administration's approval to forgive the Paycheck Protection Loan, which had a
principal amount of $3.4 million . For more information, see the "Liquidity and
Capital Resources" section below.
Interest expense, net consists of the amortization of the debt issuance costs on
our Convertible Notes (as defined in the "Liquidity and Capital Resources"
section below); the amortization of the discount on our debt obligation to
Shenghe; interest expense associated with promissory notes with certain
investment funds managed by and/or affiliated with JHL Capital Group and QVT
Financial , which were repaid in full upon the consummation of the Business
Combination; and the expense associated with the 0.25% per annum interest rate
on our Convertible Notes, offset by interest capitalized.
Interest expense, net increased year over year by $1.6 million , or 148%, to $2.6
million for the three months ended June 30, 2021 , reflecting interest expense
from our Convertible Notes and the amortization of the discount on our debt
obligations to Shenghe, which was higher than the interest expense incurred on
the promissory notes in the prior year. During the three months ended June 30,
2021 , we capitalized interest of $0.2 million . No interest was capitalized for
the three months ended June 30, 2020 .
Interest expense, net increased year over year by $1.9 million , or 103%, to $3.8
million for the six months ended June 30, 2021 , reflecting interest expense from
our Convertible Notes and the amortization of the discount on our debt
obligations to Shenghe, which was higher than the interest expense incurred on
the promissory notes in the prior year. During the six months ended June 30,
2021 , we capitalized interest of $0.2 million . No interest was capitalized for
the six months ended June 30, 2020 .
Income tax expense consists of an estimate of U.S. federal and state income
taxes and income taxes in the jurisdictions in which we conduct business,
adjusted for federal, state and local allowable income tax benefits, the effect
of permanent differences and any valuation allowance against deferred tax
assets. The effective tax rate (income taxes as a percentage of income or loss
before income taxes) including discrete items was 18.5% and 19.8% for the three
and six months ended June 30, 2021 , as compared to (0.5)% and (0.6)% for the
three and six months ended June 30, 2020 , principally due to a full valuation
allowance as of June 30, 2020 .
Quarterly Performance Trend
While our business is not seasonal in nature, we sometimes experience a timing
lag between production and sales, which may result in volatility in our results
of operations between periods. In addition, the efficiency improvements we made
in the processing of our rare earth materials resulted in significantly higher
production of REO starting in the third quarter of 2019.
The following table presents our REO production and sales volumes, as well as
our realized price per REO MT, for the quarterly periods indicated:
FY2021 FY2020 FY2019
(in whole units or
dollars) Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2
REO production volume
(MTs) 10,305 9,849 9,337 10,197 9,287 9,682 8,673 9,417 5,490
REO sales volume (MTs) 9,877 9,793 10,320 9,429 10,297 8,321 8,561 9,852
4,533
Realized price per REO MT(1)$ 7,343 $ 5,891 $ 4,070 $
3,393
(1)Our realized price per REO MT for the quarterly periods prior to the second quarter of 2020 were adversely impacted by the imposition of Chinese import duties in 2018 (and subsequent increase inMay 2019 ). The import duties were lifted inMay 2020 . 32 -------------------------------------------------------------------------------- Table of Contents Non-GAAP Financial Measures We present Total Value Realized, Production Costs, Adjusted EBITDA, Adjusted Net Income and Free Cash Flow, which are non-GAAP financial measures that we use to supplement our results presented in accordance with GAAP. These measures are similar to measures reported by other companies in our industry and are regularly used by securities analysts and investors to measure companies' financial performance. Total Value Realized, Production Costs, Adjusted EBITDA, Adjusted Net Income and Free Cash Flow are not intended to be a substitute for any GAAP financial measure and, as calculated, may not be comparable to other similarly titled measures of performance or liquidity of other companies within our industry or in other industries. Total Value Realized Total Value Realized, which we use to calculate our key performance indicator, realized price per REO MT, is a non-GAAP financial measure. As mentioned above, realized price per REO MT is an important measure of the market price of our product. The following table presents a reconciliation of our Total Value Realized, to our product sales, which is determined in accordance with GAAP, as well as the calculation of realized price per REO MT: For the three months ended
June For the six months ended June
30, 30,
(in thousands, unless otherwise stated) 2021 2020 2021 2020
Product sales $ 73,118 $ 30,391 $ 133,089 $ 51,110
Adjusted for:
Shenghe Implied Discount(1) - 3,023 - 3,630
Other(2) (596) (1,563) (2,878) (1,721)
Total Value Realized $ 72,522 $ 31,851 $ 130,211 $ 53,019
Total Value Realized $ 72,522 $ 31,851 $ 130,211 $ 53,019
Divided by:
REO sales volume (in MTs) 9,877 10,297 19,670 18,618
Realized price per REO MT (in
(1)Represents the difference between the contractual amount realized by Shenghe and the amount of deferred revenue we recognized. (2)The amounts for the six months endedJune 30, 2021 , and the three and six months endedJune 30, 2020 , pertain primarily to tariff rebates due to the retroactive effect of lifting the Chinese tariffs inMay 2020 . The amount for the three months endedJune 30, 2021 , pertains to revenue recognized under our government contracts. (3)May not recompute as presented due to rounding. 33 -------------------------------------------------------------------------------- Table of Contents Production Costs Production Costs, which we use to calculate our key performance indicator, production cost per REO MT, is a non-GAAP financial measure. As mentioned above, production cost per REO MT is a key indicator of our production efficiency. The following table presents a reconciliation of our Production Costs to our cost of sales (excluding depreciation, depletion and amortization), which is determined in accordance with GAAP, as well as the calculation of production cost per REO MT: For the three months ended June For the six months ended June 30, 30, (in thousands, unless otherwise stated) 2021 2020 2021 2020 Cost of sales (excluding depreciation, depletion and amortization)$ 17,955 $ 16,865 $ 35,891 $ 29,532 Adjusted for: Costs attributable to sales of stockpiles (6) (112) (79) (262) Stock-based compensation expense(1) (578) - (1,896) - Shipping and freight (2,183) (2,210) (4,281) (3,912) Production Costs$ 15,188 $ 14,543 $ 29,635 $ 25,358 Production Costs$ 15,188 $ 14,543 $ 29,635 $ 25,358 Divided by: REO sales volume (in MTs) 9,877 10,297 19,670 18,618
Production cost per REO MT (in
(1)Pertains only to the amount of stock-based compensation expense included in cost of sales (as opposed to general and administrative). (2)May not recompute as presented due to rounding.
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Adjusted EBITDA
We calculate Adjusted EBITDA as our GAAP net income or loss before interest
expense, net; income tax expense or benefit; and depreciation, depletion and
amortization; further adjusted to eliminate the impact of stock-based
compensation expense; transaction-related and other non-recurring costs;
non-cash accretion of asset retirement and environmental obligations; gain or
loss on sale or disposal of long-lived assets; write-downs of inventories;
royalty expense to SNR; tariff rebates; and other income, net. We present
Adjusted EBITDA because it is used by management to evaluate our underlying
operating and financial performance and trends.
Adjusted EBITDA excludes certain expenses that are required in accordance with
GAAP because they are non-recurring, non-cash or are not related to our
underlying business performance. This non-GAAP financial measure is intended to
supplement our GAAP results and should not be used as a substitute for financial
measures presented in accordance with GAAP.
Our Adjusted EBITDA does not reflect our results of operations on a comparable
basis between periods due to the accounting treatment of the modifications of
our agreements with Shenghe (see the "Recent Developments and Comparability of
Results" section above). Accordingly, our Adjusted EBITDA trend for the
periods presented may not be indicative of future trends. If the Shenghe Implied
Discount applicable to sales made under the Original Offtake Agreement had been
included in our deferred revenue, our Adjusted EBITDA for the three and six
months ended June 30, 2020 , would have been higher by $3.0 million and $3.6
million , respectively.
The following table presents a reconciliation of our Adjusted EBITDA, which is a
non-GAAP financial measure, to our net income (loss), which is determined in
accordance with GAAP:
For the three months ended June For the six months ended June
30, 30,
(in thousands) 2021 2020 2021 2020
Net income (loss) $ 27,166 $ (62,491) $ 43,285 $ (60,566)
Adjusted for:
Depreciation, depletion and amortization 6,666 1,382 12,816 2,653
Interest expense, net 2,639 1,066 3,793 1,869
Income tax expense 6,164 336 10,655 336
Stock-based compensation expense(1) 4,498 - 10,171 -
Transaction-related and other non-recurring
costs(2) 247 1,619 1,305 1,831
Accretion of asset retirement and environmental
obligations 592 564 1,185 1,128
Loss on sale or disposal of long-lived assets,
net(3) 170 - 37 -
Write-down of inventories(4) 1,809 - 1,809 -
Royalty expense to SNR - 366 - 853
Settlement charge(5) - 66,615 - 66,615
Tariff rebate(6) - (1,446) (2,050) (1,446)
Other income, net(7) (3,504) (155) (3,559) (237)
Adjusted EBITDA $ 46,447 $ 7,856 $ 79,447 $ 13,036
(1)Principally included in "General and administrative" within our unaudited
Condensed Consolidated Statements of Operations. Approximately $3.7 million and
$7.8 million of the amounts for the three and six months ended June 30, 2021 ,
respectively, pertained to a one-time grant of stock awards to employees and
executives upon the consummation of the Business Combination.
(2)Amounts for the three and six months ended June 30, 2021 , relate to advisory,
consulting, accounting and legal expenses principally in connection with the
secondary equity offering, which was completed contemporaneously with the
Convertible Notes offering in March 2021 , and the redemption of the Company's
Public Warrants in May and June 2021 . The Company did not receive any proceeds
from the secondary equity offering. Amounts for the three and six months ended
June 30, 2020 , include mainly advisory, consulting, accounting and legal
expenses in connection with the Business Combination.
(3)Included in "General and administrative" within our unaudited Condensed
Consolidated Statements of Operations.
(4)Represents a non-cash write-down of a portion of our legacy low-grade
stockpile inventory during the second quarter of 2021 after determining that the
inventory contained a significant amount of alluvial material that did not meet
the Company's requirement for mill feed.
(5)As discussed in the "Recent Developments and Comparability of Results"
section above, in connection with terminating the DMA, we recognized a one-time,
non-cash settlement charge.
(6)Represents non-cash revenue recognized in connection with tariff rebates
received relating to product sales from prior periods.
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(7)Principally represents a non-cash gain recognized as a result of the Small
Business Administration's approval to forgive the Paycheck Protection Loan.
Adjusted Net Income
We calculate Adjusted Net Income as our GAAP net income or loss excluding the
impact of depletion; stock-based compensation expense; transaction-related and
other non-recurring costs; gain or loss on sale or disposal of long-lived
assets; write-downs of inventories; royalty expense to SNR; tariff rebates; and
other income or loss, net; adjusted to give effect to the income tax impact of
such adjustments. To calculate the income tax impact of such adjustments on a
year-to-date basis, we utilize an effective tax rate equal to our income tax
expense excluding material discrete costs and benefits, with any impacts of
changes in effective tax rate being recognized in the current period. We present
Adjusted Net Income because it is used by management to evaluate our underlying
operating and financial performance and trends.
Adjusted Net Income excludes certain expenses that are required in accordance
with GAAP because they are non-recurring, non-cash, or not related to our
underlying business performance. As a result of the SNR Mineral Rights
Acquisition, the mineral rights for the rare earth ores contained in our mine
were recorded at fair value as of the date of the Business Combination,
resulting in a significant step-up of the carrying amount of the asset which
will cause depletion to be meaningfully higher in future periods. This non-GAAP
financial measure is intended to supplement our GAAP results and should not be
used as a substitute for financial measures presented in accordance with GAAP.
Our Adjusted Net Income does not reflect our results of operations on a
comparable basis between periods primarily due to the accounting treatment of
the modifications of our agreements with Shenghe (see the "Recent Developments
and Comparability of Results" section above). Accordingly, our Adjusted Net
Income trend for the periods presented may not be indicative of future trends.
The following table presents a reconciliation of our Adjusted Net Income, which
is a non-GAAP financial measure, to our net income (loss), which is determined
in accordance with GAAP:
For the three months ended June For the six months ended June
30, 30,
(in thousands) 2021 2020 2021 2020
Net income (loss) $ 27,166 $ (62,491) $ 43,285 $ (60,566)
Adjusted for:
Depletion(1) 4,686 28 9,217 57
Stock-based compensation expense(2) 4,498 - 10,171 -
Transaction-related and other non-recurring
costs(3) 247 1,619 1,305 1,831
Loss on sale or disposal of long-lived assets,
net(4) 170 - 37 -
Write-down of inventories(5) 1,809 - 1,809 -
Royalty expense to SNR - 366 - 853
Settlement charge(6) - 66,615 - 66,615
Tariff rebate(7) - (1,446) (2,050) (1,446)
Other income, net(8) (3,504) (155) (3,559) (237)
Tax impact of adjustments above(9) (1,632) 362 (3,569) 378
Adjusted Net Income $ 33,440 $ 4,898 $ 56,646 $ 7,485
(1)Principally includes the depletion associated with the mineral rights for the
rare earth ores contained in the Company's mine, which were recorded in
connection with the SNR Mineral Rights Acquisition at fair value as of the date
of the Business Combination, resulting in a significant step-up of the carrying
amount of the asset.
(2)Principally included in "General and administrative" within our unaudited
Condensed Consolidated Statements of Operations. Approximately $3.7 million and
$7.8 million of the amounts for the three and six months ended June 30, 2021 ,
respectively, pertained to a one-time grant of stock awards to employees and
executives upon the consummation of the Business Combination.
(3)Amounts for the three and six months ended June 30, 2021 , relate to advisory,
consulting, accounting and legal expenses principally in connection with the
secondary equity offering, which was completed contemporaneously with the
Convertible Notes offering in March 2021 , and the redemption of the Company's
Public Warrants in May and June 2021 . The Company did not receive any proceeds
from the secondary equity offering. Amounts for the three and six months ended
June 30, 2020 , include mainly advisory, consulting, accounting and legal
expenses in connection with the Business Combination.
(4)Included in "General and administrative" within our unaudited Condensed
Consolidated Statements of Operations.
(5)Represents a non-cash write-down of a portion of our legacy low-grade
stockpile inventory during the second quarter of 2021 after determining that the
inventory contained a significant amount of alluvial material that did not meet
the Company's requirement for mill feed.
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(6)As discussed in the "Recent Developments and Comparability of Results"
section above, in connection with terminating the DMA, we recognized a one-time,
non-cash settlement charge.
(7)Represents non-cash revenue recognized in connection with tariff rebates
received relating to product sales from prior periods.
(8)Principally represents a non-cash gain recognized as a result of the Small
Business Administration's approval to forgive the Paycheck Protection Loan.
(9)Tax impact of adjustments is calculated using an adjusted effective tax rate,
excluding the impact of discrete tax costs and benefits, to each adjustment. The
adjusted effective tax rates were 20.6%, 21.1%, (0.5)%, and (0.6)% for the three
and six months ended June 30, 2021 and 2020, respectively. The rate for the
three and six months ended June 30, 2020 , reflects a full valuation allowance.
Free Cash Flow
We calculate Free Cash Flow as net cash provided by or used in operating
activities less additions of property, plant and equipment. We believe Free Cash
Flow is useful for comparing our ability to generate cash with that of our
peers. The presentation of Free Cash Flow is not meant to be considered in
isolation or as an alternative to cash flows from operating activities and does
not necessarily indicate whether cash flows will be sufficient to fund cash
needs.
The following table presents a reconciliation of our Free Cash Flow, which is a
non-GAAP financial measure, to our net cash provided by operating activities,
which is determined in accordance with GAAP:
For the six months ended June 30,
(in thousands) 2021 2020
Net cash provided by operating activities(1) $ 47,969 $ 2,242
Additions of property, plant and equipment (44,691) (4,828)
Free Cash Flow $ 3,278 $ (2,586)
(1)Under the terms of the A&R Offtake Agreement and pursuant to the accounting
treatment thereof, we recognized $22.9 million and $0.7 million of non-cash
revenue during the six months ended June 30, 2021 , and 2020, respectively, which
was retained by Shenghe to reduce our outstanding debt obligation.
Liquidity and Capital Resources
Liquidity refers to our ability to generate sufficient cash flows to meet the
cash requirements of our business operations, including working capital and
capital expenditure needs, contractual obligations, debt service and other
commitments. Historically, our principal sources of liquidity have been the
Offtake Advances from Shenghe, issuances of notes or other debt, and net cash
from operating activities. More recently, through the consummation of the
Business Combination, including the PIPE Financing, and the issuance of the
Convertible Notes (as discussed further below), we raised $504.4 million and
$672.3 million in net proceeds, respectively.
As of June 30, 2021 , we had $1,196.9 million of cash and cash equivalents,
$690.0 million principal amount of long-term debt (to third parties) and $48.7
million principal amount of related-party debt pertaining to our Offtake
Advances with Shenghe.
Our results of operations and cash flows depend in large part upon the market
prices of REO and particularly the price of rare earth concentrate. Rare earth
concentrate is not quoted on any major commodities market or exchange and demand
is currently limited to a relatively limited number of refiners, a significant
majority of which are based in China . Although we believe that our cash flows
from operations and cash on hand is adequate to meet our liquidity requirements
for the foreseeable future, uncertainty exists as to the market price of REO,
especially in light of the ongoing COVID-19 pandemic, including the emergence of
new variants (such as the Delta variant).
Our current working capital needs relate mainly to our mining and beneficiation
operations. Our principal capital expenditure requirements relate mainly to the
periodic replacement of mining or processing equipment, as well as our Stage II
optimization project to recommission and optimize our idled refining facilities.
Our future capital requirements will depend on several factors, including future
acquisitions and potential additional investments in further downstream
production (for example, pursuit of any Stage III downstream opportunities for
the production of rare-earth-based magnets and/or other finished components). If
our available resources prove inadequate to fund our plans or commitments, we
may be forced to revise our strategy and business plans or could be required, or
elect, to seek additional funding through public or private equity or debt
financings; however, such funding may not be available on terms acceptable to
us, if at all.
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Debt and Other Long-Term Obligations
Convertible Notes: On March 26, 2021 , we issued $690.0 million aggregate
principal amount of 0.25% unsecured green convertible senior notes that mature,
unless earlier converted, redeemed or repurchased, on April 1, 2026 (the
"Convertible Notes"), at a price of par. Interest on the Convertible Notes is
payable on April 1st and October 1st of each year, beginning on October 1, 2021 .
The Company received net proceeds of $672.3 million from the issuance of the
Convertible Notes.
The Convertible Notes are convertible into shares of the Company's Common Stock
at an initial conversion price of $44.28 per share, or 22.5861 shares, per
$1,000 principal amount of notes, subject to adjustment upon the occurrence of
certain corporate events. However, in no event will the conversion exceed
28.5714 shares of Common Stock per $1,000 principal amount of notes.
Prior to January 1, 2026 , at their election, holders of the Convertible Notes
may convert their outstanding notes under the following circumstances: (i)
during any calendar quarter commencing with the third quarter of 2021 if the
last reported sale price of the Company's Common Stock for at least 20 trading
days (whether or not consecutive) during the period of 30 consecutive trading
days ending on, and including, the last trading day of the immediately preceding
calendar quarter is greater than or equal to 130% of the conversion price on
each applicable trading day; (ii) during the five business day period after any
five consecutive trading day period (the "measurement period") in which the
trading price (as defined below) per $1,000 principal amount of Convertible
Notes for each trading day of the measurement period was less than 98% of the
product of the last reported sale price of the Company's Common Stock and the
conversion rate on each such trading day; (iii) if we call any or all of the
Convertible Notes for redemption, at any time prior to the close of business on
the scheduled trading day immediately preceding the redemption date; or (iv)
upon the occurrence of specified corporate events set forth in the indenture
governing the Convertible Notes. On or after January 1, 2026 , and prior to the
maturity date of the Convertible Notes, holders may convert their outstanding
notes at any time, regardless of the foregoing circumstances.
The Convertible Notes may, at the Company's election, be settled in cash, shares
of Common Stock of the Company, or a combination thereof. The Company has the
option to redeem the Convertible Notes, in whole or in part, beginning on April
5, 2024 .
If we undergo a fundamental change (as defined in the indenture governing the
Convertible Notes), holders may require us to repurchase for cash all or any
portion of their outstanding notes at a price equal to 100% of the principal
amount of the notes to be repurchased, plus accrued and unpaid interest to, but
excluding, the fundamental change repurchase date. In addition, following
certain corporate events that occur prior to the maturity date of the
Convertible Notes or if we deliver a notice of redemption, we will, in certain
circumstances, increase the conversion rate for holders who elect to convert
their outstanding notes in connection with such corporate event or notice of
redemption, as the case may be.
We intend to allocate an amount equal to the net proceeds from the Convertible
Notes offering to existing or future investments in, or the financing or
refinancing of, eligible "green projects." Eligible green projects are intended
to reduce the Company's environmental impact and/or enable the production of
low-carbon technologies. We aim to achieve a level of allocation for eligible
green projects which matches the amount of such net proceeds. Pending such
allocation of the net proceeds to eligible green projects, we intend to use the
net proceeds from the Convertible Notes offering for general corporate purposes.
Offtake Advances: As of June 30, 2021 , we had debt recorded to Shenghe with a
carrying amount of $45.8 million , of which $48.7 million was principal and $2.9
million was debt discount. The debt to Shenghe is to be satisfied primarily
through product sales, as described above, where partial non-cash consideration
is received by the Company in the form of debt reduction (generally equal to
approximately 15% of the ultimate market value of the REO, excluding tariffs,
duties and certain other charges). Additional cash payments will be required as
a result of sales of offtake products to other parties, and under certain other
conditions. See also "Recent Developments and Comparability of Results"
section above.
We follow an imputed interest rate model to calculate the amortization of the
embedded discount, which is recognized as non-cash interest expense, by
estimating the timing of anticipated payments and reductions of the debt
principal balance. The effective rate applicable from the June 5, 2020 ,
inception to June 30, 2021 , was between 4.41% and 10.37%. As of June 30, 2021 ,
we estimated the timing of repayment to be within the next year which resulted
in an updated imputed interest rate of 11.50%. The increase in the imputed rate
is primarily due to changes in expected market prices resulting in an earlier
anticipated repayment of the outstanding balance through the various mechanisms,
which results in a higher implicit interest rate in order to fully amortize the
debt discount concurrent with the expected final repayment of the debt balance.
Paycheck Protection Loan: In April 2020 , the Company 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
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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 , was to mature on
April 14, 2022 , and bore interest at a rate of 1% per annum. Under the terms of
the PPP, loans 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. In June 2021 , the Company
received notification from the Small Business Administration that the Paycheck
Protection Loan and related accrued interest was forgiven.
Equipment Notes: We entered into several financing agreements for the purchase
of equipment, including trucks, tractors, loaders, graders, and various other
machinery. As of June 30, 2021 , we had $11.0 million in principal (and accrued
interest) outstanding under the equipment notes.
In February 2021 , we entered into financing agreements for the purchase of
equipment, including trucks and loaders, in the aggregate amount of $9.7
million , including an amount for the associated extended warranties. These
equipment notes have terms of 5 years and interest rates of 4.5% per annum with
monthly payments commencing in April 2021 .
Public Warrants
Warrants to purchase 11,499,968 shares of the Company's Common Stock at $11.50
per share were issued in connection with FVAC's initial public offering ("IPO")
(the "Public Warrants") pursuant to the Warrant Agreement, dated April 29, 2020
(the "Warrant Agreement"), by and between the Company and Continental Stock
Transfer & Trust Company ("CST"), as warrant agent. These warrants qualified as
equity instruments as they were indexed to the Company's stock and settlement in
shares was within the Company's control. Accordingly, the Public Warrants were
included in "Additional paid-in capital" within the Company's unaudited
Condensed Consolidated Balance Sheet as of December 31, 2020 .
On May 4, 2021 , at the direction of the Company, CST, in its capacity as warrant
agent, delivered a notice of redemption to each of the registered holders of the
outstanding Public Warrants for a redemption price of $0.01 per warrant (the
"Redemption Price"), that remained outstanding following 5:00 p.m. New York City
time on June 7, 2021 (the "Redemption Date").
In accordance with the Warrant Agreement, the Company's Board of Directors
elected to require that, upon delivery of the notice of redemption, all Public
Warrants were to be exercised only on a "cashless basis." Accordingly, holders
could not exercise Public Warrants and receive Common Stock in exchange for
payment in cash of the $11.50 per warrant exercise price. Instead, a holder
exercising a Public Warrant was deemed to pay the $11.50 per warrant exercise
price by the surrender of 0.3808 of a share of Common Stock that such holder
would have been entitled to receive upon a cash exercise of a Public Warrant.
Accordingly, by virtue of the cashless exercise of the Public Warrants,
exercising warrant holders received 0.6192 of a share of Common Stock for each
Public Warrant surrendered for exercise. All Public Warrants that remained
unexercised at 5:00 p.m. New York City time on the Redemption Date were
delisted, voided and no longer exercisable, and the holders had no rights with
respect to those Public Warrants, except to receive the Redemption Price.
During the three months ended June 30, 2021 , the Company issued 7,080,005 shares
of its Common Stock as a result of the cashless exercise of 11,434,455 Public
Warrants. The Company redeemed the remaining 65,513 Public Warrants outstanding
at the Redemption Date for a nominal amount.
Cash Flows
The following table summarizes our cash flows:
For the six months ended June
30, Change
(in thousands, except percentages) 2021 2020 $ %
Net cash provided by operating activities
$ 45,727 2040 %
Net cash used in investing activities
$ (39,738) 823 %
Net cash provided by financing activities
$ 631,762 1631 % Net Cash Provided by Operating Activities: The increase in net cash provided by operating activities of$45.7 million for the six months endedJune 30, 2021 , compared to the prior year period, reflects the increase in product sales, partially offset by the increase in our cost of sales and general and administrative expenses (all as discussed above). In addition,$22.9 million of our product sales was excluded from cash provided by operating activities since that portion of the sales price was retained by Shenghe to reduce the debt obligation. 39
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Table of ContentsNet Cash Used in Investing Activities: Our current, recurring capital expenditure needs consist mainly of purchases of property, plant and equipment, including mining equipment. The increase in net cash used in investing activities of$39.7 million for the six months endedJune 30, 2021 , compared to the prior year period, is mainly attributable to an increase in capital expenditures relating primarily to our Stage II optimization project, as well as commissioning of our CHP facility and water treatment plant. Net Cash Provided by Financing Activities: The increase in net cash provided by financing activities of$631.8 million for the six months endedJune 30, 2021 , compared to the prior year period, primarily relates to the net proceeds received from the issuance of the Convertible Notes inMarch 2021 of$672.3 million , partially offset by the$35.5 million in proceeds received from the Second Additional Advance during the six months endedJune 30, 2020 . Off-Balance Sheet Commitments and Arrangements We do not engage in any off-balance sheet financing activities, nor do we have any interest in entities referred to as variable interest entities. Critical Accounting Policies A complete discussion of our critical accounting policies is included in our Form 10-K for the year endedDecember 31, 2020 . There have been no significant changes in our critical accounting policies during the three months endedJune 30, 2021 . Recently Adopted and Issued Accounting Pronouncements Recently adopted and issued accounting pronouncements are described in Note 2, "Significant Accounting Policies," in the notes to our unaudited Condensed Consolidated Financial Statements.
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