#AIS: MP Materials CEO James Litinsky on rare earths, supply chain, and energy independence

Hey everyone. So, I'm Jim. Uh I used to run a hedge fund and now I'm an accidental industrialist. Um so, I want to take you through that journey. Um and then while I do that, it'll, you know, we'll go through the problem that I'd like to solve. Just to provide some context, so I think if we think about a lot of the things that just came up with respect to the economy, it's been about a decade plus since the global financial crisis. And in that decade plus, we've been in this environment where there's been essentially a full-on boom, a lot of money printing, and essentially a very low or negative cost of capital in growth in technology, right? And what we've seen now, I guess we're on the beginning stages of the aftermath of experiencing that economic enema as was just discussed, but we have just been through this period of over a decade where there's been, you know, all this money that has gone to growth. And what has happened during that time simultaneously is the real economy has been starved. Um you haven't seen I doubt many of you have friends that are investing in new steel mills or aluminum mills or nickel mines. Maybe nickel mines now, right? But while the real economy has been starved, actually interestingly, we haven't noticed it so much one because we're just starting to scale into electrification. Um but China's made investments. So pretty much all of the incremental steel and aluminum and commodities capacity in the world over the last decade has come online because, you know, China has led the way. And you know, as an aside, interestingly, about 80% of the aluminum and 80% of the steel production in China is done with coal. So not only has this been, you know, not only have they sort of taken over the real stuff. And this isn't about, you know, where wherever you are on the spectrum of is you know, are they just a really tough competitor or is this some kind of economic World War III? It doesn't matter. What matters is that the incremental stuff in the real world has really the way has been led by China. And so when we think about what's now happening in the world as we electrify, what I want to move on to the next one here.

Um I think one good thing about going after Elon is I don't have to really explain this chart. Um we are electrifying. And as we electrify, what a lot of people might not fully understand is that while all this real stuff has come online, the Chinese have actually moved downstream, very intelligently. And so when we think about a lot of people may have heard of China 2025, but a lot of people probably haven't heard of China 2035, which is the current MO, which is to move downstream into standardization. And so actually when we look around the world today, four of the top 10 OEMs are Chinese by global battery electric share. And so when we think about the single largest private employer in the country, the auto industry, we think about all these industries that are mineral intensive, the Chinese actually have moved downstream. And these are very mineral intensive industries. So what this slide shows is as we go from a fossil fuel world to an electrification world, which you know, we all I think everyone in this room believes is fake complete. Um And this actually excludes steel and aluminum. Just in the content of copper, nickel, lithium, and then what I focus on, rare earths, and some of these other things, there's seven times as much content. And so when we think about the past of the fossil fuel driving geopolitical gamesmanship and power in the world, the future is about minerals. And what I focus on are rare earths. And so um we And I'm going to get to my journey as an accidental industrialist in a minute, but what you can see here is rare earths, they're kind of the way to think about it is sort of like a young cousin of semiconductors to the EV business. So regardless of how electrification happens, regardless of battery chemistry, how that energy gets to a motor, that motor moves via magnets. And so, this industry is expected to explode. Um and it's not just EVs, it's, you know, wind turbines, drones, robots. Can anyone actually guess where this robot is from? This is actually from Short Circuit, Johnny Number 5, but I'm hoping Elon will get us a better robot of the future. But when we think about all these industries, magnetics, it's really powerful. So, um that's where I'm focused, and this is just an example of the commodity needs as we electrify. If we take those projections of what's going to happen in electrification just in my space, so this is NDPR, this is the stuff that we make, the input into magnetics, you can see there's a huge deficit that is looming.

And here's moving on. Look at my space. Here's the challenge. So, outside of us, this entire supply chain is essentially domiciled in China. And it doesn't even have to be nefarious, but what happens when the largest manufacturers in the world are all competing for what I showed you on that prior slide, a shortage of supply, and we've seen lots of headlines, whether it's the semiconductor issue, or just today there was a headline that Rivian is fighting with a supplier over seat costs, all these things where we're seeing the shortages in the supply chain that are flowing through, if there's an allocation of materials, and the materials are controlled by China or another geopolitical rival, which downstream businesses do we think are going to get those materials? And this is actually now an existential issue for all of us. Um so, back to my story. Um so, this is Mountain Pass. This is the mine Chamath mentioned that we bought this out of bankruptcy in my fund. So, going back about 5 years ago, this site went bankrupt. It was a public company. It sort of it rose and then it fell. Um and nobody believed that we could compete against China. And in fact, I had to we showed up I showed up in the Delaware courthouse steps. I mean, it was literally like out of a movie. There were other creditors pushing to send this thing into bankruptcy. And you know, you look at this thing and you're like, wait, this is the one of the most valuable rare earth materials mines in the world. And this is the future. This is a material for electrification and no one wants it. Not only does no one want it, but people think that actually we can't even produce here economically because the Chinese have taken over the industry. And so, we actually kicked in a couple million dollars just to keep it in care maintenance, just to keep the eight employees on site going so that this thing could actually keep its permit through the bankruptcy because otherwise they were just going to raze it to the ground. So, we we went through that journey. Um and we ended up buying it. And so, these assets this is about $2 billion of replacement cost. Not to mention the fact that you know, this is one of the marquee sites in the world and it's in a stable jurisdiction. All these assets up over here to the left, these are what make it environmentally friendly. So, we don't put anything back into the water supply. We have dry tailings, which essentially means that for sure we're the cleanest rare earth operation in the world. If you go on to YouTube, you can kind of see how historically some of that mining and processing is done. But no one wanted it. Um and everyone thought that this couldn't be done, but we bought it out of bankruptcy. We took on it was sort of a distressed turnaround and startup at the same time. We had no accounting software. Um we literally had eight people in a mine. And I show up I'm my hedge fund manager. And people thought I was pretty insane. And probably if I knew what I was getting into, like I said, it was an accident. No, but I couldn't believe that no one else wanted to do this and I frankly I felt as an American somebody had to do this. And you know, there I was on the courthouse steps and so I went for it.

And you know, fast forward to today and we're now we're now public. We went as Chamath mentioned, went public a couple years ago. We're 6 and a half billion dollar market cap. It's been obviously a massive Thank you. [applause] Um So this has been a massive home run for myself and my investors, but more importantly I I don't belittle that. Ultimately we're capitalist here. We want to do a great job for our clients and ourselves. But I hope that we can kind of contextualize this for what needs to happen throughout our economy because I do think that as painful as the adjustment may be that we're now in this period that we're about to be in with some of the as the capital comes out of the growth space, there is going to be a big beautiful bull market in real stuff. And it is just beginning and I can I'll give some statistics with the besties. I don't want to ruin my besties time. So I'm going to finish up real quick. But there's a lot of stuff that needs to get built and this supply chain stuff is existential. And so what we're doing at MP, you can see our stage one we're doing we just reported our quarter a couple weeks ago. We're now from a site four years ago that I had to beg on the courthouse steps just to keep it alive. We're now doing approximately 450 million of run rate EBITDA today. Um so you know, these and then we announced the deal we announced the deal with GM where after actually have already broken ground at a magnetics facility in Fort Worth, Texas and this is a scale deal. It's not exclusive. We expect to bring in other OEMs where we'll be making magnets. So, we'll be shipping material that will be environmentally produced from Mountain Pass, California over to our site in Fort Worth and make magnetics. And our goal is to build a Western magnetics champion. Um, and so, I guess with all of that, I would say, hopefully this kind of thing can inspire you. We need The good news is there needs to be a lot more stuff like this. I maybe I'll share some stats on, you know, some of the other space cuz I don't want to make this just about rare earths. But when we think about all the materials that we need for this electrification boom, and the supply chain that needs to be built, this is like this is the era of it's as if it's, you know, the 1910s and Ford is just out. I mean, there is an entire supply chain and it's not just EVs, it's wind turbines, it's drones, it's robots, and it needs to be a bunch of real stuff that we all create. And so, I don't think some percentage of us don't need to necessarily debate whether crypto is going to go up or down. You know, now's a time to pivot, I think, because this is something that we need to do to get competitive again. So, I guess with that, I'll flip the mic and feel the fire from the besties. Thank you.

So, it's a great question and the data is tough because a lot of it is relying on battery chemistry. And so, we don't know exactly how much nickel it'll be, how much, you know, but we do know certainly lithium, nickel, copper, all of these things, it's multiples. We need Here's actually Maybe this is a great stat. Some good source that I utilize estimated that we probably need on the order of 40 to 50 copper and nickel projects over the next couple decades. So, call it roughly 200 billion dollars of CapEx to satisfy the demand for electrification that we have over the next couple decades. And what's so interesting, you mentioned and obviously I assume Elon sees this, is if you look at the multiples, you know, just think about it from a strict investor point of view, from a financial arbitrage standpoint. Look at the multiples of where auto auto OEMs trade [Right.] or, you know, certainly Tesla. And then look at what's happening in the mining industry today. So, actually the nickel industry is dominated by essentially Glencore and Vale. Those two businesses, and I'm not, you know, I'm not pitching stocks, but as an investor, you know, we'll see what the next couple of those two businesses right now at today's commodities prices are essentially going to free cash flow themselves out in 3 years. [Time to buy their stock.] buying back stock. Right.

And so, this is how stark the arbitrage is that in the real economy, mining and materials companies, steel companies are trading at double-digit free cash flow yields. They're buying back stock. They have no leverage in their businesses. And then downstream, everyone's relying on them. And upstream, these guys, they don't want to spend to build out new capacity because the cost of capital is too high. So, what's going to happen is I think you're going to see maybe an AOL Time Warner moment, and I don't mean it the negative way, but I think you could see a Tesla or someone like that buy upstream into these industries because ultimately downstream [Wow.] they all realize that the real stuff is in shortage, and you can't have the enterprise value downstream because it's like musical chairs.

So, the single most important thing we do at MP is safety. And we actually on our last earnings call said, you know, last 2 years we've had 2 years without a lost time injury and we gave everybody, every single employee in the company, a big a cash bonus to celebrate that milestone, which is really critical. The reality is this isn't software, right? It's real stuff. All we can do is our best. I just think I think frankly as as a human being as an American, I would rather have mines being done in America even in the state of California over elsewhere in the world where I certainly know that I assure you that nickel mining in Russia is not as environmentally friendly as it is in Canada.

Well, fair since a great point you raised about the Germans because I think it's a fair analogy to say that Germany is to natural gas as we are to China supply chain. And so we see we see this coming, right? We see And again, this is this speaks to geopolitical leverage, yes.

national security

It's a democracy issue.

Well, how about this? I'll make a prediction. I'll bet that in the next 5 years we will see a major household name OEM fail or need a bailout due to not, you know, prices went up on them, but lack of access to a material, some kind of critical material.

Somebody. Probably not GM.

let me step back and then step down to that. So, investment styles are cyclical just like industries. You know, I believe in cycles, right? Price The cure for high prices is high prices. There's no question in my mind whether it's that, or there will be someone, or frankly, maybe someone in this audience will have some breakthrough, right? And so, we will solve this problem. But the challenge is is that I don't even think that we've ignited the proper focus and resources to actually solve this problem. And so, there may be that may be an example of a solution, but that'll take 5 to 10 years. But in the meantime, there's you know, there's a lot of resources that need to be applied to it.

So, I I I think you actually said it perfectly well in the lead-in, which is just anything that is real stuff. And so, yeah, all of it. Lithium, copper, nickel, steel, aluminum, all of these areas that have been starved. The cost of capital is just so high across the board that if you can come up with solutions to deliver the shortages, and again, I'm not saying the next 3 months, we could have a brutal recession for 6 months, but we see the long-term 5-10 year trend. I think anywhere you look in this space, you're looking in the right direction. It's a wind at your back as opposed to And again, I'm not, you know, taking a view, but to come up with a new cryptocurrency right now. It's a huge wind at your back relative to

That's a great question, and that's the challenge is that it takes to to get any of these things, it takes a decade, right? It takes If you have all of the capital in place, all of the human capital, all the just the, you know, going through that process to build it, the materials cost. And so, could I do it? I think the world needs it, and I think that what we do environmentally is so unique that I think we could get it done, but this is a big challenge, and I think frankly, it's a it's a you you guys were talking in the last session about we need to come together. This is a big-time area where we need to come together. There should be a grand bargain, right? There should be The environmentalists should say, 'Okay, I accept that we need this stuff. I accept that we don't want it to be only made in Russia and China.' And they should loosen up on some of the permitting stuff, and I think the people who are just like, you know, drill, drill, drill, mine, mine, mine, don't care, need to accept that we need to have really tough standards. Um and I think we should have some kind of grand bargain, and it could be, you know, tax policy focused on it, but there needs to be some kind of coming together in our country to recognize that we need this stuff. I mean, let's be intellectually honest. People are hypocrites. The people in the EU, people in the United States, they want the energy, they want to achieve their complaining about the expense of, you know, even a modest increase in energy cost, 10%, 20%, which they could withstand, they will complain about it, and they they will not allow fracking in their country, but they're more than willing to let Russia frack for it. They don't want the cobalt coming out of the ground in California, they're more than willing to let 15-year-olds dig it out of the ground without a mess. Eight-year-olds. As horrific as it is, and they there is intellectually dishonest, it's hypocrisy, and I think we have to own the fact that we want to live in large houses, and we want to blow the air conditioner on some ridiculous setting. America's homes are three times bigger than other homes.

Uh and and so to your point, when the rubber meets the road, these unfortunate decisions get made. And there's no way to you know, sort of come top-down.

But and it's such a great point, and my entire argument is that we're going to we will answer this question as a country either now or later. And the point about four of the 10 largest auto OEMs in the world are now Chinese companies. And so, this is now a competitive issue, and so we can keep kicking the can or we'll face a crisis.

Well, I think that it's fair to say that the local officials are very happy with what we've done with what we've achieved. And the in Fort Worth, Texas, the magnetic facility. You know, the we have some partnerships with DOD. The president announced those. [is in Texas.] Uh the GM thing's in Texas. [In Texas.] Texas. Um so, I think that there is frankly support from both sides of the aisle for what we're doing. Uh you know, there were executive orders on the rare earth magnetics industry specifically both in the Trump administration and in the Biden administration. So, I think what we're doing is hopefully non-partisan and frankly, I think all of this should be and that's, you know, the point about the grand bargain. But even you raise a great point about just all of this stuff that it's you know, there's so much pushback and we need to figure out a way to get past that cuz this stuff has to get made.