MP Materials Corp. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. MP Materials operates the Mountain Pass rare earth mine and processing facility and primarily sells rare earth concentrate to Shenghe. The interim financial statements are unaudited.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Product sales | $73.1 million | $30.4 million | $133.1 million | $51.1 million |
| Operating income (loss) | $32.5 million | ($61.2) million | $54.2 million | ($58.6) million |
| Net income (loss) | $27.2 million | ($62.5) million | $43.3 million | ($60.6) million |
| Diluted EPS | $0.15 | ($0.92) | $0.24 | ($0.90) |
| Adjusted EBITDA (non-GAAP) | $46.4 million | $7.9 million | $79.4 million | $13.0 million |
- Q2 sales rose 141%; six-month sales rose 160%. Higher realized prices were the main driver: $7,343 per REO metric ton in Q2, up 137%, and $6,620 for the six months, up 132%. Q2 sales volume fell 4% to 9,877 metric tons; six-month volume increased 6% to 19,670 metric tons.
- Production cost per REO metric ton increased 9% in Q2 to $1,538 and 11% for the six months to $1,507, reflecting higher materials, freight and payroll costs. Management said short-term operating efficiencies largely offset these pressures.
- Approximate operating and net margins were 44% and 37% for Q2, respectively, and 41% and 33% for the six-month period, calculated from reported sales and income.
- Operating cash flow was $48.0 million for the six months; capital expenditures were $44.7 million, leaving non-GAAP free cash flow of $3.3 million. Cash flow included $22.9 million of revenue retained by Shenghe to reduce debt rather than received in cash.
Balance sheet, liquidity and debt
- At June 30, cash and cash equivalents were $1.197 billion; restricted cash was an additional $9.5 million. Current assets were $1.246 billion and current liabilities $90.3 million.
- Total debt carrying value was approximately $730 million: $673.2 million net carrying value on the convertible notes and $45.8 million on Shenghe advances. The convertible notes have $690 million principal; Shenghe advances had $48.7 million principal. Equipment notes totaled $11.0 million and are included in other liabilities. The filing says the Shenghe obligation is expected to be repaid within the next year, based on current forecasts.
- In March 2021, the Company issued $690 million of 0.25% unsecured green convertible senior notes due 2026, receiving $672.3 million net proceeds. Initial conversion price is $44.28 per share. Management said cash resources were adequate for foreseeable needs, while noting funding needs could change with project costs, market prices and downstream plans.
Changes, outlook and notable items
- The earnings turnaround reflects substantially higher rare earth prices and sales, while the prior-year comparison included a $66.6 million non-cash settlement charge related to termination of a distribution and marketing agreement with Shenghe. The 2020 and 2021 revenue periods are also affected by changes in accounting under the restructured Shenghe agreement.
- Management expects to invest approximately $220 million in the Stage II optimization project, principally in 2021 and 2022, and continues to target production rates and profitability in 2023. Revised process design is expected to reduce reagent consumption by more than 10%; management said the target does not require recommissioning the chlor-alkali facility.
- Q2 included a $1.8 million non-cash write-down of unusable legacy stockpile inventory. The Company also recognized a $3.4 million gain after its Paycheck Protection Program loan was forgiven. Stock-based compensation was $4.5 million in Q2 and $10.2 million for the six months.
- Shenghe accounted for more than 90% of product sales and is the principal customer and a related party. The arrangement directs product sales and certain earnings or proceeds to repay Shenghe advances; this concentration and dependence on China-related markets are material risks.
- Risks include rare earth price volatility, China trade and policy developments, port congestion and shipping delays, COVID-19 impacts, power availability, project cost or schedule overruns, and reliance on a single operating site. Management stated there were no material changes to previously disclosed risk factors.
- The Company disclosed a former employee representative labor-law action; it disputes the allegations and cannot estimate a loss range. Asset retirement obligations were $26.5 million and environmental obligations $16.6 million on the balance sheet; major mine reclamation cash outflows are estimated to begin in 2043.
Important facts for investors to verify
- Whether Stage II remains on budget and on track for the 2023 production and profitability targets.
- Whether reported sales prices and margins are sustainable, and how much sales and debt repayment continue to depend on Shenghe and Chinese market conditions.
- Actual timing and amount of Shenghe advance repayments versus management’s forecast, including the sensitivity of the obligation to market prices and estimates.
- Cash available after capital spending, and potential funding needs if project costs rise or downstream investment proceeds.
- Potential dilution or cash settlement exposure under the convertible notes, and the outcome of the labor-law case and pending reclamation-plan review.