Business context and reporting period
MP Materials Corp. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2021. It operates the Mountain Pass rare-earth mine and processing facility in California, selling rare-earth concentrate principally to Shenghe, which markets it to customers in China. The company is pursuing Stage II optimization to produce separated rare-earth oxides.
Financial and operating performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $99.8 million | $41.0 million | $232.8 million | $92.1 million |
| Operating income (loss) | $54.1 million | $16.2 million | $108.3 million | $(42.4) million |
| Net income (loss) | $42.8 million | $14.6 million | $86.0 million | $(45.9) million |
| Diluted EPS | $0.23 | $0.20 | $0.47 | $(0.67) |
| Adjusted EBITDA (non-GAAP) | $68.3 million | $11.6 million | $147.7 million | $24.6 million |
- Q3 product sales rose 141% year over year, reflecting a 36% increase in sales volume to 12,814 REO metric tons and a 127% increase in realized price to $7,693 per REO metric ton. Production was 11,998 REO metric tons, up 18%.
- Q3 production cost was $1,449 per REO metric ton, versus $1,389 a year earlier. Management cited higher payroll and headcount, partly offset by operational efficiencies.
- For the first nine months, operating cash flow was $70.5 million; investing cash outflow was $83.7 million, including $86.4 million of property and equipment additions; and financing cash inflow was $669.6 million. Free cash flow, a non-GAAP measure, was negative $13.3 million.
- At September 30, cash and cash equivalents were $1.179 billion, total assets $1.849 billion, and stockholders’ equity $954.2 million. Long-term debt had a $674.1 million carrying value for the convertible notes; Shenghe-related debt had a $30.9 million carrying value and $32.6 million principal. Equipment notes totaled $10.3 million.
Material changes versus comparable periods
Revenue and earnings improved substantially year over year, driven by higher rare-earth prices and sales volumes. Nine-month results also compare against a $66.6 million non-cash settlement charge recorded in 2020. The prior-year revenue comparison is affected by changes to the Shenghe arrangements and accounting treatment; the company cautions that certain periods are not directly comparable. General and administrative expense increased to $14.9 million in Q3, including stock-based compensation and higher public-company, personnel, insurance and legal costs.
Outlook, commentary, risks and unusual items
- Management expects to invest approximately $220 million in Stage II, principally during 2021 and 2022, and targets production rates and profitability in 2023. The revised project scope is intended to avoid recommissioning the chlor-alkali facility, previously estimated to cost about $30 million. Management said current cash resources should cover near-term needs, but did not assure that they will be sufficient.
- Shenghe accounted for more than 90% of product sales. The offtake arrangement directs a portion of sales consideration to debt reduction, and company estimates put repayment of the Shenghe obligation within the next year. Timing and amount depend on market prices and other contractual factors.
- The company issued $690 million of 0.25% unsecured convertible notes due 2026, receiving $672.3 million net proceeds. Initial conversion price is $44.28 per share; conversion or settlement could affect future share count or cash needs.
- Key risks include rare-earth price volatility, reliance on a single major customer and the China market, trade-policy changes, COVID-related shipping and supply-chain disruption, potential power shortages, and Stage II cost or schedule overruns. Mountain Pass is a single operating site.
- Unusual items included $3.4 million of income from forgiveness of the PPP loan, a $1.8 million inventory write-down during the first nine months, and a roughly $1 million labor-lawsuit settlement agreed in October 2021 and included in Q3 expense, subject to court approval.
- Estimated undiscounted future cash flows were $142.3 million for asset retirement obligations and $27.8 million for environmental remediation. County rezoning may affect reclamation requirements, but the reclamation plan was not yet finally approved.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. It said it was not party to material legal or governmental proceedings.
Important facts for investors to verify
- Stage II spending, schedule, commissioning progress and whether targeted 2023 production and profitability remain achievable.
- Customer concentration, Shenghe contract terms, realized pricing and the timing and mechanics of repayment of the related-party obligation.
- How much reported revenue converts to cash, given product-sale amounts retained by Shenghe to reduce debt, and the trajectory of free cash flow as capital spending continues.
- Convertible-note conversion and settlement terms, potential dilution, and total debt obligations.
- Rare-earth price and shipment trends, production costs, COVID-related logistics conditions, and the status of reclamation and environmental obligations.