MP Materials CFO Otto Schwethelm oversees a finance operation that, by his definition, is as conventional as they come. He doesn’t worry about non-GAAP metrics or customer engagement or other means to measure performance in the way so many businesses today do. But his company is in a field that’s anything but conventional.
It is the only company in the United States that mines and processes rare earths, the strategically important elements that make modern technology and weaponry possible. Now, with the U.S. deep in the midst of a trade war with China — a country that has a virtual stranglehold on rare earths — the federal government is very much interested in what his company is doing as MP Materials ramps up its capacity to be able to do end-to-end processing completely in-house.
MP Materials is the closest thing the U.S. has to ensuring it has the domestic capacity to maintain the availability of rare earths to strategically important industries.
“What we’re doing moves us from being completely dependent on China for further processing to having some alternatives," Schwethelm told CFO Dive.
Diminished U.S. capacity
There are 17 rare earth elements in the world, including neodymium and praseodymium, known together as NdPr. Those two are among the main building blocks of the permanent magnets that make it possible to manufacture cell phones, the guidance systems for weapons and satellites, and the other products that define the economy today.
U.S. companies had mining and processing operations of rare earths in place domestically decades ago, but over the years mines and processing plants were sold — often to Chinese companies that shut the operations down and moved them abroad.
MP Operations, in its current form, is only about two and a half years old. It was formed out of an earlier company that had mined rare earths in a massive open-pit mine in Mountain Pass, California, about 50 miles outside of Las Vegas, where the company is headquartered. The company’s previous owner invested almost $2 billion to upgrade its processing capacity, but it went bankrupt before it could get its new processes underway.
The private equity investors that bought the company out of bankruptcy are taking a very different approach. Instead of digging ore from its Mountain Pass mine to extract cerium (Ce) — a rare earth element used mainly in the treatment of water, which was the market approach taken by the previous owner — the company is focused on extracting NdPr and, to a lesser extent, lanthanum (La).
“Our ownership after the bankruptcy came in and identified a different component of our ore body, which is NdPr, among the primary products,” Schwethelm said.
Use of NdPr in the guidance systems of strategic weapons and satellites has the federal government interested in the market, but the government remains a small buyer. The main driver of the NdPr business in the years ahead — and what Schwethelm expects to be the company’s profit engine — is the growth in electric cars and trucks, which rely on permanent magnets to function.
“That supply-demand curve is primarily driven by the penetration of electric vehicles,” Schwethelm said. “Obviously, the United States is a little bit behind the curve, but with the global imposition of regulations, in China and the E.U., where they're allocating percentages of penetration of electric vehicles into their total vehicles, is significant. So, that demand curve quickly outstrips the ability to supply based on the current production.”
His company will also have other buyers to fuel demand for NdPr, because wind turbines, drones, and even conventional cars and trucks, to a limited extent, use permanent magnets. But it’s the electric vehicle market, he says, that will create what he called “staggering” demand for the elements.
Expanded processing in late 2020
Schwethelm’s company today is extracting ore from its Mountain Pass mine and doing a preliminary kind of processing. It’s grinding the ore and, using a chemical bath, separating out the mix of rare earth elements into what’s called bastnaesite — a semi-separated mix of elements that includes NdPr and some others. But the next stage of processing, in which the NdPr and lanthanum are fully separated out, remains outside the company's capacity.
Late next year, though, the previous owner’s multi-billion-dollar investment in new processing capacity is scheduled to come online, enabling the company to take the next step forward and completely process the ore in-house.
“We’re just reconfiguring and bringing those downstream units on line [that the previous owner invested in] to further separate the bastnaesite that we produce to the NdPr and the lanthanum,” he said.
Even then, China won’t be completely out of the picture, because most facilities that produce permanent magnets are in that country.
“Only from the standpoint of fully separating the rare earths that are inherent in our ore body will we have an end-to-end processing capacity,” he said. “It would still require additional processing to convert those raw materials into the end-product of magnets. So, the gap between the separated rare earths and the conversion of the rare earths into the physical magnets is the big commercialization piece that the supply chain is missing outside of China.”
Schwethelm said there are factories manufacturing permanent magnets in Vietnam and Thailand, but their capacity is limited. Most magnets will continue to come out of China. “The other countries provide an alternative for smaller amounts of the NdPr,” he said.
Partner provides expertise
Once his company is in the market with fully-processed NdPr, it will have a competitive advantage over NdPr produced in China, Schwethelm said. The ore coming out of Mountain Pass is richer in element content than Chinese ore — 8% compared to 2% — but also comes with far fewer environmental hazards. The Mountain Pass ore throws off very little radiation, in part because of the modernizing process the previous owners started, compared to the ore mined in China and also in Australia, the only other country where rare earths are mined. (Australia also relies on China for processing.)
“We have an extremely low, almost non-existent, radioactivity content,” he said. “So, there is less uranium and any other radioactivity. As you do the research on Lynas [the company that owns the Australian rare earths mine], they have some real issues relative to a lot of the radioactive waste that’s been left in Malaysia [where they previously processed ore] as a result of their separation facilities. So, that is an issue we do not have. A lot of it is the investment that the previous ownership made relative to the processing we have. They closed the water systems, so we do not damage any of the environment as a result of our processing, both from the processing standpoint as well as the low radioactivity of our ore body.”
Schwethelm said the company has been relying on the expertise of one of its owners, an experienced mine operator in China, that has about a 10% stake, to help it structure its new processing capacity as efficiently as possible.
“What’s the appropriate grind size of the ore that maximizes the flotation in the separation chemicals?” he said. “It’s been a tremendous benefit to us from the standpoint of information sharing, enabling us to ramp up very quickly by using their expertise on separation of rare earths.”
The partner also has provided them a pathway to get their ore to buyers in China. “They were involved from the start as part of the original ownership group, coming out of bankruptcy, between our two hedge funds,” he said.
Stable pricing in market
Schwethelm said the tracking and forecasting he does is completely conventional for an extraction business. “It’s all about generating free cash flow to support internal growth as well as reinvestment in the assets,” he said. “It’s all about revenue and cost per metric ton, making the right management decisions based on profitability and cash flow.”
He said there hasn’t been a lot of volatility in the price per metric ton because their bastnaesite is relatively stable as a commodity. “As you look into into the forecast, it doesn’t have the transparency of oil and gas, which is where I spent the majority of my career, because of the limited amount of transactions, most of which happen in China,” he said. “But as the global supply and demand expand, you’ll see increased transparency. But with the continued penetration, as you look at some of the statistics coming out, from the number of vehicles that are being converted to electric, whether it’s the Nissans, the Hondas, the BMWs, the Teslas, that will become an increasing component of the supply chain and the availability and along with that an increased demand for the permanent magnets.”
Schwethelm said China's 25% tariff imposed on their bastnaesite in retaliation for U.S. tariffs isn’t materially affecting the company’s finances, but it will be a help to its bottom line should they get lifted.
“Lower tariffs don’t change [the calculus] that much,” he said. “Objectively, it's just an additional cost that is added on and reduces our sale price as the product goes into China. As trade relations hopefully improve, that 25% additional cost goes away and falls directly to our bottom line.”
Should the tariffs come down before its increased capacity goes up, the future looks especially bright for his company.
“We see a very strong demand curve that is quickly overshadowing the ability of anybody to supply that, and so that’s why we’re very motivated as quickly as possible to complete our capital program and get to being able to fully separate the rare earths,” he said.