MP Materials Corp. annual report, FY2020

MP Materials Corp. — FY2020 Form 10-K

Reporting period: Fiscal year ended December 31, 2020. This is an annual report, not a standalone fourth-quarter filing. MP Materials operates the Mountain Pass rare-earth mine and processing facility in California. In November 2020, it completed a business combination with Fortress Value Acquisition Corp.; the transaction was accounted for as a reverse recapitalization. The financial statements principally reflect the historical operations of MP Mine Operations LLC.

Financial performance and liquidity

Metric	FY2020	FY2019	Change / context
Product sales	$134.3 million	$73.4 million	Up 83%; primarily higher sales volume and realized prices
Net loss	$21.8 million	$6.8 million	Widened, largely reflecting a $66.6 million non-cash settlement charge
Operating loss	$34.7 million	$7.6 million	Higher expenses, including the settlement charge and public-company/transaction costs
Adjusted EBITDA (non-GAAP)	$42.6 million	$1.9 million	Management-defined measure; not directly comparable because of Shenghe agreement accounting changes
Operating cash flow	$3.3 million	$(0.4) million	Improved, but included $21.3 million of non-cash revenue applied to debt reduction
Capital expenditures	$22.4 million	$2.3 million	Higher, primarily due to initial Stage II spending
Free cash flow (non-GAAP)	$(19.1) million	$(2.7) million	Operating cash flow less property, plant and equipment additions

• REO-equivalent production was 38,503 metric tons, up 39%; sales volume was 38,367 metric tons, up 43%.
• Realized price was $3,311 per REO metric ton, up 19%; production cost was $1,430 per REO metric ton, down 28%. These are management-defined measures.
• At December 31, 2020, cash and cash equivalents were $519.7 million, versus $2.8 million a year earlier. Current assets were $561.0 million and current liabilities $43.1 million.
• Shenghe-related debt had $71.8 million principal outstanding and a $66.5 million carrying amount after debt discount. Other reported debt included a $3.4 million Paycheck Protection Program loan and $2.1 million of equipment notes. PPP forgiveness had been requested but was not assured.
• Restricted cash was $12.8 million. The company also reported $38.4 million of reclamation surety bonds, with $8.7 million in cash collateral.

Material changes and unusual items

• Revenue rose with greater production and sales and improved pricing after Chinese tariffs were suspended. FY2020 product sales included $10.3 million in tariff-related credits; $3.7 million of value associated with pre-June 2020 Shenghe sales was not recognized as product sales under the prior accounting treatment.
• The June 2020 restructuring of Shenghe arrangements replaced deferred revenue accounting with a debt obligation, terminated the technical services and distribution/marketing agreements, and resulted in a $66.6 million non-cash settlement charge. The amended offtake agreement retains a take-or-pay arrangement while Shenghe recovers its advances.
• Revenue concentration remained high: Shenghe accounted for more than 90% of product sales. The company relies on Shenghe to purchase and market substantially all current concentrate production in China.
• The November business combination brought the mineral rights into the consolidated company. A $434.7 million mineral-rights asset was recorded, and the company expects materially higher depletion expense in future periods. The 2020 and 2019 results also differ due to transaction timing and related accounting.
• The company recorded a $17.6 million income tax benefit, including the release of most of its valuation allowance. It nevertheless reported a net loss for the year.
• Fourth-quarter 2020 REO sales volume was 10,320 metric tons and realized price was $4,070 per metric ton; the filing’s quarterly table does not provide a standalone fourth-quarter income statement.

Outlook, risks, and contingencies

• Stage II is intended to move Mountain Pass from concentrate production to separated rare-earth oxides. The company estimated approximately $220 million of project capital costs, principally in 2021 and 2022, with targeted production rates by the end of 2022 and targeted production and profitability in 2023. Management cautioned that cost and timing could increase.
• At planned rates, the company expects approximately 20,000 metric tons of separated REO annually, excluding cerium concentrate, including about 6,075 metric tons of NdPr. A Stage III downstream expansion into metals, alloys, and magnets is a longer-term opportunity, expected to commence in 2025 or later, not a committed near-term project.
• Management said available cash and operating cash flows were expected to meet foreseeable liquidity needs, while acknowledging that additional funding might be needed if resources prove inadequate or plans change. The company identified Stage II execution, permitting, equipment procurement, operating performance, and customer contracting as key uncertainties.
• Management planned to restart the natural-gas-powered combined heat and power facility in 2021; savings and reliable operation were not assured. The chlor-alkali facility was not required to achieve the stated Stage II targets and might be restarted later.
• The company’s principal risks include rare-earth price volatility; China-related trade, policy, and tariff exposure; reliance on Shenghe; shipping and port disruption; COVID-19; competition and possible predatory pricing; and execution, financing, and permitting risks at its sole operating facility.
• Environmental and reclamation obligations include estimated asset retirement obligations of $25.6 million and environmental obligations of $16.6 million on the balance sheet. Groundwater contamination from prior operations remains subject to monitoring and remediation; the company said the extent of contamination was still being delineated.
• A former employee’s California labor-law representative action was pending. The company disputed the allegations and said it could not estimate a loss range. It reported no other material legal proceedings and no material proceedings known to be threatened.
• The filing disclosed a material weakness in internal controls related to insufficient personnel with appropriate U.S. GAAP and financial-reporting experience. Separately, management concluded disclosure controls and procedures were effective; the report did not include management’s annual assessment of internal control over financial reporting because of a newly public company transition period.

Most important facts for investors to verify

• Whether Stage II stays within the approximately $220 million budget and reaches production targets on the stated schedule.
• How Shenghe’s remaining advances are repaid, when the offtake agreement may terminate, and whether direct customer contracts for separated products are secured.
• Whether reported operating cash generation is sustainable after accounting for non-cash revenue, capital spending, and working-capital needs.
• Whether reserve, recovery, cost, and mine-life assumptions remain supportable as Mountain Pass transitions to separated REO production.
• Progress in remediating groundwater issues, maintaining permits and reclamation assurances, and addressing the disclosed internal-control weakness.