MP Materials Corp

NYSE:MP

Earnings Call Transcript 2020-Q4

[Operator]

Good afternoon. My name is Shantel and I'll be your conference operator today. At this time, I'd like to welcome everyone to the MP Materials Fourth Quarter and Full Year 2020 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.

At this time, I would like to turn the call over to Martin Sheehan, Head of Investor Relations. Martin, please go ahead.

[Martin Sheehan, Head of Investor Relations]

Thank you, operator, and good day, everyone. Welcome to MP Materials fourth quarter 2020 earnings call. With me today are James Litinsky, Chairman and Chief Executive Officer of MP Materials; Michael Rosenthal, Chief Operating Officer; Ryan Corbett, Chief Financial Officer; and Sheila Bangalore, Chief Strategy Officer and General Counsel.

Before we get to change to Ryan's opening remarks, I'd like to remind you that during today's call, we will make certain forward-looking statements that do not constitute historical facts under the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Forward-looking statements are predictions, projections and other statements about future events that are based on current expectations and assumptions, and as a result, are subject to risks and uncertainties. Many factors could cause actual future events to differ materially from forward-looking statements in this communication. For more information about factors that may cause actual results to materially differ from forward-looking statements, please refer to the cautionary language in the earnings release and in our filings with the SEC, including the Risk Factors section in our recent SEC filings.

During the call, management will also discuss certain non-GAAP financial measures, which we believe to be useful in evaluating MP Materials operating performance. These measures should not be considered in isolation or as a substitute for MP Materials financial results prepared in accordance with GAAP. A reconciliation of these measures to the most directly comparable GAAP measures is available in our current report on Form 8-K filed today and can be found on our website, investors.mpmaterials.com.

With that, I'll turn the call over to Jim. Jim?

[James Litinsky, Chairman & Chief Executive Officer]

Thanks, Martin. And thanks, everyone, for joining us today. Welcome to our fourth quarter and full year 2020 call. I'm going to cover a few things today. First, I'll recap our strong fourth quarter results capping a milestone year for MP. Second, I'll update you on our Stage II optimization plan at Mountain Pass. Then I will turn it over to Ryan for some color on our performance. And lastly, I'll share some perspective on the current market environment and how we're positioned for it.

Starting with the financial highlights. In the fourth quarter, we generated strong production volumes as well as records for both shipments and revenues. These results show that we are clearly enjoying the benefit of strong pricing, which has continued to rise post year-end, but we are also demonstrating operating leverage on a unit production cost basis. You can see the combined effect of these trends and the significant margin expansion we've reported for the fourth quarter. We believe the growth and cost improvement illustrate that we continue to operate our facility at best-in-class levels with both uptime and yields remaining at or near the record levels we've established since restarting Mountain Pass. Also fourth quarter accounting awesome year from a performance standpoint and we are continuing to execute at a high level.

2020 was also a milestone year in charting MP's future. As you know, we completed a go public transaction in November, which gave us a Fortress balance sheet as we execute on Stage II and beyond. We also took important steps to scale the Company as we prepare to become a leading global producer of separated rare earths both on-site and in building out our management team. We currently have over 300 employees across our engineering and site personnel as well as important public company functions across finance, legal, communications and other key areas.

And finally, we closed out the year by putting the final pieces in place to execute on our Stage II optimization plan. We have now implemented important design improvements that we believe will significantly de-risk stage II. Essentially, we invested further in the front engineering stage of our Stage II project to improve our processes in circuit design. Through these efforts, we believe that our technical team identified ways to improve product yields, expected first pass on-spec production rates and reagent usage efficiencies including recycling. Importantly, I'm very pleased to tell you that due to these achievements, we believe we no longer need to restart the Chlor-Alkali facility to achieve the 2023 expected operating model we outlined last year on an apples-to-apples basis. This is because we believe we found ways to permanently reduce the reagent usage per ton of REO. We think this is a significant de-risking of our Stage II, though we still remain maniacally focused on the key work streams of commissioning the roasting circuit, product finishing assets, salt crystallizer and other site upgrades.

I will walk through more details on this in a moment but first, I'd like to cover our production metrics. The team is doing an outstanding job executing illustrated by a strong fourth quarter in 2020 year-over-year growth in production. Importantly, while we've increased shipment volumes by 20% in the quarter and 40% for the full year, concentrate pricing in the fourth quarter increased 70%, demonstrating that the demand for NdPr remains very strong. And you can also see here the production cost improvement I highlighted a moment ago. For the full year, we reduced production costs on a per metric ton basis by nearly 28%.

As we move through our Stage II and contemplate future initiatives including evaluating heavy rare earths, moving downstream into magnets and other potential initiatives, we believe the progress and rapid learning we're achieving today will lead to significant additional opportunities to increase profitability and cash flows. As we've said to many of you, 2021 is about execution on Stage II. For those who aren't as familiar with our strategy, Stage II is our plan to move from today's profitable concentrate production to separating rare earth oxides, thereby restoring downstream production of these critical elements in United States of America. Upon expected completion of this project in 2022, we will be scaling toward full annual run rate production of more than 6,000 metric tons of NdPr. As we stated during the going public process last year, we expect 2023 will be the first full year production at these levels. Keep in mind though that the 2023 target of $250 [ph] million in normalized EBITDA that we outlined last year, assumed a spot NdPr price of $70 per kilo. NdPr spot today is actually roughly $88.

So with that background, I'm pleased to report that Stage II remains on track, long lead equipment is arriving on site, our fixed price engineering and procurement contract is signed and construction is underway. That said, with our unwavering owner operator mentality, we do not rest. In recent months, our team made important design improvements that we believe significantly de-risk the project, enhance our potential long-term operating model and reduce our environmental footprint. So for those of you who followed us, we originally announced estimated Stage II project cost back in July. They consisted of a total of $200 million in two primary parts. The first $170 million related to mainly reinstituting the roasting step and adding a salt crystallizer, which is intended to restore the separation process flow to how it work successfully for decades in Mountain Pass.

As the chart here indicates, this capital outlay has not changed since we first announced those plans. We also had a Stage IIB, which was focused on the restart of the Chlor-Alkali facility for managing reagents used in the refining process. This project was to consume the remaining $30 million of the Stage II capital cost. The successful completion of Stage II construction and Chlor-Alkali were the execution drivers needed for us to achieve the normalized 2023 EBITDA target that we shared with you. But we've been busy. We believe that what is now underway on an apples-to-apples basis versus July should have lower structural cost per REO metric ton produced as well as improve upon our already strong environmental profile and we no longer need to restart Chlor-Alkali in the near term to achieve those previously disclosed targets.

So let me be specific; the redesign will significantly reduce the amount of reagents used per ton of REO processed in our refining process, in some cases, by over 10%, reducing our original expectations for operating costs in Stage II. Restarting the Chlor-Alkali facility in the future remains an option for us, but one might now analyze it as a separate and new incremental potential high return investment opportunity that could further enhance shareholder value. Restarting the facility in the future means we could potentially have more excess reagents to sell into the open market, driving an improved ROI. Therefore, we now have a contracted Stage II underway with a net capital cost consistent with prior estimates despite what we believe are significant design improvements for all of the reasons I've outlined.

Moreover, I believe this is a pretty remarkable achievement for our team when you consider the rapid cost inflation that we are seeing throughout the economy. This is particularly acute for infrastructure materials like steel, lumber and concrete. In fact, since our July 2020 estimate, steel prices are up 150%, lumber prices are up 130% and concrete is up 30%. As we execute, we hope to experience the upside leverage that could come from rising commodity prices against an in-place multi-billion dollar and difficult to replace asset base. I would also add that this is particularly powerful to consider in light of what we believe is the beginning stages of a demand-driven commodity cycle. Whatever the market thought new supply would cost, I think it is fair to say it has recently gone up a lot.

Now, I will turn it over to Ryan to talk through the financial highlights.

[Ryan Corbett, Chief Financial Officer]

Thanks, Jim, and hello, everyone. Jim already covered a few of the financial headlines and we have all of the details in our press release. So I'll give an overview of how we think about our financial results and share some thoughts on how we're looking at 2021.

We delivered impressive growth in Q4 and for the full fiscal year. Jim spoke about the strong demand and pricing environment, which drove the doubling of our revenues in the quarter and the 83% percent growth for the full year. The lifting of import duties in China has also contributed to higher realized prices, but the headline for us as the demand is strong and although we can't predict pricing or shipping schedules quarter to quarter, we expect to continue to sell through all of our production. In addition to the price and sales side of the equation, our adjusted EBITDA benefited from the continued excellent work Michael and his team are doing to improve our processes, reduce risk and ultimately increase the productivity of Stage I. Unit costs were down year-over-year mainly due to these process improvements, which drove a higher average concentrate grade and higher mineral recoveries compared to last year. Put it another way, our improvements are generating higher percentages of rare earth oxides and concentrate and we continue to achieve higher productivity per ton of ore fad [ph].

As we continue to effectively manage our per unit production costs, you can see the leverage that exists in this model when demand and pricing are strong. This combination caused our margins to triple in Q4 compared to last year's fourth quarter and was the driver of our roughly 300% increase in EBITDA. Keep in mind that this EBITDA growth includes about six weeks of the impacts of public company costs following our listing. And while we will be seen the full quarter impact of these costs moving forward, we feel good about production costs and our market outlook.

Lastly on production costs, although down year-over-year, the sequential increase is partly due to typical seasonality with our planned year-end plant turnaround, but results were also impacted by a project to diversify our reagent supply chain and enjoy sustainable U.S based source of these critical materials. We embarked on a full-scale reagent pilot for mid-October into late January of the first quarter and it took a lot of hard work from the team, but ultimately we were successful in this full-scale test and it was an important achievement for the Company. Given the supply chain issues we have all seen in industries like semiconductors, proving out a suitable alternative for our reagents was critical. As you would expect with a limited volume commitment for a trial, pricing for these reagents was slightly higher per unit of contained REO. With the tremendous success of the pipeline as evidenced in our record production gives us confidence that we now have supply redundancy that would come at a similar or better per unit cost of our current reagent scheme. So although costs were up slightly from Q3 on a per unit basis, the reduction in risk to our Stage I process was well worth the investment.

On the next slide I thought it would be useful to dig into our reported cash flow and provide some context, so that you can see how our Stage I process is generating free cash flow for the business. In the appendix section of the slide, you'll see a detailed walk of how we get from adjusted EBITDA to our reported operating cash flow and then our reported free cash flow. As looking at Slide 9 specifically, on the left side of the chart, you see our free cash flow for the year was negative $19 million. But if we adjust for our offtake pay down, the CapEx spent on our Stage II optimization and related projects as well as deal expenses and one-time items, our Stage I process generated approximately $34 million of normalized free cash flow in 2020 as a very strong 25% free cash flow margin for the year. Keep in mind, that the offtake balance is essentially debt, but per U.S GAAP, the impact of the pay down of that agreement because our offtake partner retains a portion of the cash from sales to pay down the obligation, that runs through our operating cash flow instead of financing in the cash flow statement as might be expected, which is why we believe it's relevant to add back to our free cash flow for comparable metric.

Moving to Slide 10, a quick balance sheet update. As we discussed last quarter, our business combination resulted in gross proceeds of $545 million to fund our growth. We reported a net cash balance at year end of nearly $520 million, positioning us very well as we ramp-up work on Stage II. In addition, the balance on our offtake agreement was reduced to $71 million in the quarter. Regarding our share count, the earnout investing shares from our business combination all vested in the quarter, resulting in approximately 171 million shares outstanding at the end of Q4. Also approximately 11.5 million warrants remain outstanding and will become exercisable on May 4 on the one-year anniversary of the Fortress Value IPO. We've illustrated our fully diluted share count with the warrant impact captured via the treasury stock method on the table on Slide 10.

In summary, we feel very good about where we stand financially as we embark on Stage II, which as Jim noted, will now be a $210 million net headline cost with the design improvements built-in. So we are more than adequately funded for Stage II while also generating strong implied free cash flow from Stage 1. All that said, with our markets developing rapidly, we will be opportunistic with respect to how we manage our financial capacity and flexibility particularly as we see opportunities to pursue our mission of fully restoring the supply chain to be [indiscernible].

Shifting to the next slide on our fiscal year '21 operating framework. We currently anticipate modest production and shipping volume growth for the full year and should pricing hold, we are set up for a very good 2021. We continue to produce at near-record levels and our Q1 is shaping up to be a solid quarter with improved sequential revenues and EBITDA. We'll be doing a cost side as we continually optimize our Stage I process at least to continue our trend of per unit cost improvement, but expect to reinvest those gains and head count growth as we prepare for Stage II and grow our corporate functions.

Some of you might also be wondering about shipping given reports of congestion at the Los Angeles and Long Beach Ports. I remind you there that we aren't outbound shipper, so we do not believe we will see any material cost impact from what you're reading about, though general lumpiness in shipment timing is always possible given the overall congestion at the port. As for the Stage II capital spend, the ramp in capital cost is essentially beginning now with the majority of that $210 million spend occurring in late 2021.

Now, I'd like to turn it back to Jim to wrap up.

[James Litinsky, Chairman & Chief Executive Officer]

Thanks, Ryan. I would like to take a moment to remind everyone of the extraordinary opportunity unfolding for MP. When we founded the Company in 2017, we saw tremendous potential in Mountain Pass given the incredibly unique nature of the asset and its importance to electrification and supply chain reliability. We were fortunate though to have a few tough years to help us build confidence in our mission and to put in place an owner-operator culture focused on execution. We are now in the early innings of a multi-trillion dollar industrial transformation of the global economy and MP will be a part of shaping the future.

Just since our listing on the NYSE in November, it feels like the theme of electrification and de-carbonization is accelerating even faster than most people expected. We see global OEMs including Ford and GM along with their Chinese, Japanese and German counterparts announcing plans to accelerate the transition away from combustion engines. Maybe it can be best sums up by a "the other day" from Herbert Diess, the CEO of Volkswagen, who said, "Our transformation will be fast. It will be unprecedented. E mobility has become core business for us." Here in home, more and more states have adopted California's aggressive clean vehicle standards with several more expected to follow. But of course, I could just remind you about what's happening in the capital markets from cars and trucks to planes and air taxis or from multiple battery technology players, massive amounts of capital are going into SPACs and IPOs to fund electrification. The enterprise value of companies focused around auto electrification now exceeds $1 trillion. And that doesn't even include the other trillion plus from the legacy OEMs.

We see a pathway of literally hundreds of billions invested globally over the next five or so years and then likely into the trillions beyond that. Like any great boom, whether it was the railroads, the ice automobile or the Internet, useful industrial excitement and unending possibility eventually seasons into maturity, competition, consolidation and failure for some, but every great American Gold Rush era needs its picks and shovels or Blue Jeans [ph] players and this one is no different. We believe MP serves that kind of role.

Speaking about Blue Jeans, there are few areas of overwhelming bipartisan consensus in America right now, but supporting resilient, domestic supply chains is certainly one of them. Our mission is to restore the full rare earth supply chain for United States and to do so sustainably. And we believe Washington DC is getting focused on stimulating much more success for companies like ours. But we won't hold our breath. Right now, we are focused on the relentless execution that I've outlined. We are moving forward, improving our Stage I operations and implementing our Stage II optimization. In fact, a key third-party industry research firm recently published that MP is expected to be the world's lowest cost rare earth producer when we completes Stage II. We treated their chart [ph] last month, so please check that out. While we do all this, we are working in parallel on our longer term approach for Stage III. Ultimately, the main use case for rare earths is for magnets and the size of that opportunity is enormous.

So we are profitable with a strong balance sheet. We are the most environmentally responsible company in the rare earth industry evidenced by our modern facility and location in California. We believe we are on track to being the world's lowest cost producer and we are the only scaled Western supplier of a precious commodity that is critical to electrification, de-carbonization and national security.

Thank you all for joining today. Let's now have the operator begin the Q&A session.

[Operator]

[Operator Instructions] Our first question comes from Carlos De Alba with Morgan Stanley. Your line is open.

[Carlos De Alba, Morgan Stanley]

Thank you. Good afternoon, everyone. So couple of questions if I may. The first one is, so do you expect basically modest volume growth this year with a stable unit cost. Do you foresee any seasonality -- special seasonality throughout the quarters? Maybe as you ramp up more production in second half of fourth quarter, the unit cost will be lower than there will be in the first half. That will be the first question. And the second one, if you could comment please on the rebate that you are getting from the change in the -- the tariff rebate, if you can comment, when do you see that finalizing? And then in terms of the stockpile sales, also how do you see that throughout 2021? Thank you very much.

[James Litinsky, Chairman & Chief Executive Officer]

Sure. Hey, Carlos. Hey, Ryan, why don't you take both those.

[Ryan Corbett, Chief Financial Officer]

Sure. Hey, Carlos. So I'd start on your first one in terms of seasonality. I wouldn't expect there to be significant seasonality from a production basis. I think your view is probably correct in terms of the modest volume growth really taking place in the back half of the year. From a shipment standpoint, as I mentioned, that can be lumpy quarter to quarter and so it's tough to give any great color there. I think over the course of the year, we certainly intend to be selling through 100% of our production, but the individual shipments over the course of each quarter can move around a bit. On the tariff question, the tariff rebate in 2020 was really a one-time item. This reflected a rebate from the tariffs that were in place, the Chinese import duties on our product, up until March of 2020 and related to sales in the first quarter and in prior years. There may be some small amount of remaining rebate left, but not material and not anything that we could predict with certainty coming into 2021. The last piece on stockpile sales, you'll see -- I mean, those are incredibly small, a couple $100,000 a year and relate to legacy stockpiles as you mentioned. I think we'll probably continue to sell out that inventory over time, but not a material driver for us.

[Carlos De Alba, Morgan Stanley]

Perfect. Thank you very much, Jim and Ryan. Just maybe if I could add one more on the royalty expense to SNR. So, if I understood correctly from what I read in the release, the amount were around $450,000, $440,000 tons that we saw in the fourth quarter. That was the last sort of payment before the transaction was completed and a combination was done -- and a business combination was concluded and therefore we should not be seeing these any further -- or anymore in the results, right, from the first quarter on it?

[Ryan Corbett, Chief Financial Officer]

Yes, Carlos. That's right. There was no payment from the company to SNR in closing the combination, not just reflects bringing the SNR mineral royalty interest on to the balance sheet of the combined company. But going forward since both SNR and MP mine operations -- or operating business are wholly owned subsidiaries of MP Materials Corp, you will not see any royalty expense in the company going forward.

[Carlos De Alba, Morgan Stanley]

All right. Excellent. Thank you very much, guys.

[James Litinsky, Chairman & Chief Executive Officer]

Thank you.

[Ryan Corbett, Chief Financial Officer]

Thanks.

[James Litinsky, Chairman & Chief Executive Officer]

Next question?

[Operator]

Your next question comes from the line of David Deckelbaum with Cowen. Your line is open.

[David Deckelbaum, Cowen]

Good Afternoon, Jim and Ryan. Thanks for the time today.

[James Litinsky, Chairman & Chief Executive Officer]

Of course, afternoon.

[David Deckelbaum, Cowen]

I was hoping that you could -- you highlighted the fact that the third party research firm points to MP and Mountain Pass as the lowest cost producer of NdPr in the world. Could you share what you expect your targeted production cost to be on the per kilo basis once you're at run rate in 2023?

[James Litinsky, Chairman & Chief Executive Officer]

Well, I'll make a quick comment on that question which is remember that obviously today we sell a Stage I product, so we don't currently produce NdPr. The research was saying that when we're complete with Stage II, we will be -- and that's when we're actually selling NdPr. But Ryan, do you want to comment on the model and anything you want to say on that front?

[Ryan Corbett, Chief Financial Officer]

Sure. Yes, I'd say the right way to think about it as we highlighted, we think with the plan that we laid out from the design improvements today, we stand behind our view of the EBITDA guidance we provided for 2023. And so if you just do the math on sort of what we had provided during our go public transaction and just divide that cost structure -- the implied cost structure by the total NdPr we expect to produce that's in the very high 20s [ph] per kilogram. And so I think that's the right way to think about it.

[David Deckelbaum, Cowen]

I appreciate that. And then, maybe if you could just clarify that you talked about getting to that run rate of just over 6,000 tons per annum once Stage II is up and running and that would be full run rate achieved in 2023. How long do you expect to take to ramp up the capacity from sort of first separation in terms of months or quarters?

[James Litinsky, Chairman & Chief Executive Officer]

Yes, so we haven't said anything specifically about what that ramp is going to look like. What we've said is that assume that 2022 will be a year that consists of that completion, the ramp, et cetera. And then really the best way to view it is normalized 2023. So I'd love to help you but we just really haven't said anything about how that ramp will do other than obviously we will try to get it done as quickly as we possibly can.

[Ryan Corbett, Chief Financial Officer]

One other thing I'd add there David is, obviously we'll continue to sell our concentrate product that is not being consumed by the Stage II ramp up process. So obviously you see the results this quarter and our expectation for the year from a revenue and cash generation standpoint for the Stage I business, so that will continue as we ramp Stage II.

[David Deckelbaum, Cowen]

Appreciate that. The last one from me is just you highlighted the Chlor-Alkali sort of capital opportunity, why do you think that you'll have a decision around whether you want to pursue that facility or not in terms of a business opportunity?

[James Litinsky, Chairman & Chief Executive Officer]

So, we don't have a timetable on that. I think the important thing to realize is the substantial progress that we've made with respect to these design improvements where basically we believe that we can deliver on the 2023 operating model improved obviously relative and obviously we're staying on an apples-to-apples basis relative to before. So we think that that's a pretty exciting achievement. With that, we preserve our ability to ramp up Chlor-Alkali, but we haven't obviously -- we're just announcing this today, so we haven't made any -- we haven't stated any public viewers to kind of when and how we would do that other than to say that the way you should think about that is it will be a -- it is now a separate potentially high return on capital event that we will analyze like any investment opportunity.

[David Deckelbaum, Cowen]

Absolutely. I appreciate your time guys. I will get back in the queue. Thank you.

[James Litinsky, Chairman & Chief Executive Officer]

Yes, of course.

[Operator]

And our next question comes from the line of Chris Terry with Deutsche Bank. Your line is open.

[Chris Terry, Deutsche Bank]

Thank you. Hi, Jim, Ryan, Michael. I hope you're well. I had few questions. I'll just maybe do it one at a time. First one, just on the reagents, it sounds like an exciting opportunity you have there, just wondering if you could talk a little bit to how are you doing that? Is that the process itself is the same as it was and you just save on the reagents or have you slightly modified the way that you do the separation and that's where the actual savings in the reagents come about?

[James Litinsky, Chairman & Chief Executive Officer]

Yes. So, Chris, thank you for -- we'll give your -- you're giving Michael a chance to chime in here. So Michael, let me take that one.

[Michael Rosenthal, Chief Operating Officer]

Thank you, Chris. It's a good question. I think we mentioned in previous presentations that we saw that there are areas for continued improvement and how we operate it with some of the existing assets that are to be re-commissioned and optimization of the new assets that we plan to acquire. And these opportunities grows in our deep understanding of the previous generations of Mountain Pass operations as well as certain industry best practices, particularly in China. So earlier last year, we decided to extend the front-end engineering schedule in order to spend more time on R&D and pilot work before finalizing our process flow and equipment list. So ultimately we developed confidence in some of these development to incorporate that into some design changes in our final process of equipment list.

So, some of those -- some examples of that are on the roasting and leaching processes, we work to optimize the roasting and leaching conditions to improve the NdPr recovery, maximize [ph] removal and minimize reagent usage. On the leach side itself, we made adjustments to the leach processes to minimize of NdPr that remove leach solids to minimize the amount of RO water [ph] that we used and minimize the amount of reagents to use through improved recycling. On the extraction side, we made certain improvements to the processes to reduce reagent use and maximize the production of salable products including non NdPr products. And then on the finishing, the improvement in reagent handling to reduce excess reagent usage relative to our previous model and improve the recycling of materials to improve the yields. And we also made improvements to the finishing process to increase first pass production rates -- first pass on-spec production rates. And this includes sort of enhanced blending capability to blend various stages of production as well as increased storage to enable greater resiliency and flexibility of production.

So all these things contributed to leaching side [ph] of our reducing reagent usage, which also reduces the amount of spent brine that is produced, some of which we have to otherwise be neutralized which then further reduces the amount of reagents consumed. So those are the types of things that we engage and then we try to generate very high return and make us very confident in this long-term savings.

[Chris Terry, Deutsche Bank]

Thanks, Michael. Appreciate your extra color. A couple of those I just wanted to ask, do you think maybe by the middle of the year or some point early in the second half of the year, you'll be in a position to maybe give more specific timing about the startup of Stage II in 2022? Or how are you thinking about when you provide that update?

[James Litinsky, Chairman & Chief Executive Officer]

So, great question. We totally understand that people obviously want to get as updated as they possibly can throughout the way. We're going to do our best throughout this year to be transparent, let people know what's going on. Hopefully, we'll try to have some business later in the year, so people can kind of see for themselves. And so we will look to do that. But as far as the specific timetable, it's hard to give you something specific other than to say that I understand it's top of mind and investors want to know how we're progressing. And we certainly as a team -- we are execution focus, so we recognize that people want to judge us and measure us against what we say and obviously we want to do that as well. But that may not be a satisfying answer, but we'll do our best to tell you as much as we can throughout the year to keep you aware.

[Chris Terry, Deutsche Bank]

Okay. And then, just moving down a stage to Stage III. Just wondering if you can give an update on how you thinking about that. It's obviously an exciting opportunity if you can do that. But are you thinking about that still you chip away on it while Stage II is going through or you get Stage II up and running and then look at it, just trying to look at sequence of events and how Stage III might ultimately fit in.

[James Litinsky, Chairman & Chief Executive Officer]

So Chris, I'm going to give you a really unsatisfying answer unfortunately, which is we don't have any Stage III updates today. You can expect us to be very opportunistic. So I will leave it at that. And we publicly stated, obviously we have a team working on stage III. So we have a number of people and we will be opportunistic.

[Chris Terry, Deutsche Bank]

Okay. And the last one from me just relates to the market. I guess just getting the views on recent price moves in NdPr that we've seen since the start of the year, the updates from the China production quarter, just any color you can provide in general, particularly on the NdPr? Sorry, thanks.

[James Litinsky, Chairman & Chief Executive Officer]

Maybe everyone can chime in here because obviously when it comes to commodities prices, who knows. What I would say is that our belief is that this is demand driven. I mean, I think everyone can see the headlines around and the growth in the EV space and that is certainly our interpretation of what we're seeing on the ground so to speak. There were also -- around that same time of the quarters you referenced, there're also some headlines of a very senior Chinese officials talking about how they believe prices to be too low given the environmental impact of processing and I believe the exact words were prices reflected the price of earth, not the rarity or something I'm missing of the paraphrasing. But so we -- again as I've very clearly stated who knows what the next month or two [indiscernible] look like in the near term. I'm fundamentally of the belief that if you look around the world and see there were 3% percent penetrated just in electric vehicles and we are going to 90% plus over the next few decades and maybe we're going to get there pretty fast given the amount of capital that would be forming in the space, you can do the math on the demand.

And then, I think that the other incremental piece here that we tried to touch upon this during the prepared remarks is just I don't think there is a full appreciation for the true replacement cost of getting these assets online. It is our -- to do this right to be an economically viable participant in this space, it's a multi-billion dollar investment. And that if you have the ore body, as you know we have a 7% plus ore body relative to kind of some of these other projects you might see out there in some of the junior mining or other spaces, they're typically around 1% or 2% with that. And so again, it's just a look through across if you had unlimited capital and you had a permit and a plan and a viable ore body sort of none of which really exists today in the Western world, but if you have that, you then have to build a separation facility. And so, this is a massive investment and again I think given what we're seeing in materials costs and given the expertise required, I do think that people are going to find that the ability to bring new supply on line is going to end up being more challenging and more expensive than they might otherwise think by just sort of throwing a number out there. But that will be something that we will see prove out over time in the coming years. It certainly is nothing that we will be playing on the next month or two.

So, hopefully that's sort of a long-winded way of giving you our perspective on it. I don't know if Ryan or Michael want to chime in, but that's our house view.

[Chris Terry, Deutsche Bank]

Thank you. That is helpful. I think that's it from me. Thanks, guys. All the best.

[James Litinsky, Chairman & Chief Executive Officer]

Thank you, Chris.

[Operator]

We will take one more set of questions from Ben Kallo with Baird. Your line is open.

[Benjamin Kallo, Baird]

Hey, James. Hey, Ryan, Mark. Thanks for taking my questions. Maybe when Stage II get reversed [ph]. I'm just joking.

[James Litinsky, Chairman & Chief Executive Officer]

I was going to make some joke like [indiscernible].

[Benjamin Kallo, Baird]

Yes, but you talk about the downstream I think because I think that maybe it would be helpful to figure out how fragmented the margin is and what that really means and then how close to the customer that is and then how you think that, that could help maybe mitigate the price fluctuations in reverse as you move downstream?

[James Litinsky, Chairman & Chief Executive Officer]

When you say the downstream, you're referring to separate it with Stage II, right?

[Benjamin Kallo, Baird]

No, stage III.

[James Litinsky, Chairman & Chief Executive Officer]

Yes. Oh, stage III. Well, I'm going to give you the same unsatisfying answer that I again press, maybe I'll say with a little mortgage stuff. But we don't have any Stage III updates at this time, but you can expect us to be extremely opportunistic. So I'll leave that on Stage III, but it might be helpful…

[Benjamin Kallo, Baird]

The market like it -- or just in general, in that. And what that does looks like?

[James Litinsky, Chairman & Chief Executive Officer]

Oh, I see. Yes, I think here's what you -- here's the answer to what you're asking even if you're not specifically asking it, which is that we have to remember again that this is a total transformation of the supply chain, right, we've never had an electrification of the OEM market let alone the global economy, right. And so when we think about what the downstream looks like, certainly the downstream today, the magnet industry is controlled in China. But the reality is that as we evolve globally into -- you heard me quote the CEO of Volkswagen, you've certainly seen what's going on globally with investment, is unlikely that there is going to continue to be a single point of failure in the supply chain in the areas where there are viable alternatives. And so we believe that we're positioned really well to provide that. And so the reality is that the magnet business today is mainly concentrated in China. There is a little bit in Japan. But our belief is that we will be part of -- that's obviously core to our mission is that we will be part of the shaping of that as this whole world evolves and again this is just such a huge opportunity when you think about just do the math whenever -- and we've obviously put our slides on this of what you think the magnet business is today for ED [ph] as if it's 3% penetrated and goes to 30%, that's a 10 back or roughly maybe obviously scaling [ph], but it's still a huge opportunity and so we plan on being part of that solution.

And so the other thing I would say is as far as the magnets, you definitely -- there is a variety of customers at the industry stands today. The OEMs can be involved, the motor makers can be involved or the magnet producers. And so this downstream supply chain there are different parties involved in it, but we certainly know who the players are. We don't need a huge sales force to go out and talk to these folks. They know we are, we know who they are. And so I think that it's just another one of these things. Right now, if you think about the legacy OEMs, they're are thinking about evolving their business. They haven't gotten to some of these other issues because they are literally drinking from a fire hose. There are so many issues -- when you're talking about this scale of GDP that is transforming, there are just so many issues and it creates chaos right enough. You see capital formation in many companies and the good news is that there is going to be some winners, there's going to be some losers. We don't need to take an extraordinary amount of risk. And we don't need to take over the entire industry. All we need to do is be thoughtful about how we invest and execute and it's just a pretty extraordinary business opportunity.

And so, again, I know it's not a super satisfying answer, but the truth is that it's a supply chain that doesn't exist yet and we believe we're going to be part of creating it.

[Ryan Corbett, Chief Financial Officer]

This is Ryan. I'll just add a real quick on that, a couple of thoughts. Adding to what Jim was saying in terms of we don't need to take a ton of share, I mean we get asked a lot about the demand and intensity per electric vehicle and all those things. And certainly you see in our materials, we think the EV piece of the market is growing incredibly fast. But take the entire magnet market leaving capacity between now and 2030 has been double in this industry. And so I think the other thing that's really playing into our favor in a market that already we think needs to double, is I think what a key differentiator will be is access to raw materials. Since we've been active and had conversations with customers, the thing that has surprised me is the amount of time that we have very, very downstream customers all the way down to the OEMs of various types of it, not just electric vehicles. Now coming hand in hand with magnet makers to us, trying to understand, hey, if I sign this contract for magnets, is there going to be NdPr there to back it up. And so I think it's a really critical differentiator being vertically integrated and something that really no one else can do. And so I think that will be the secret sauce, if you will.

And to your point on volatility in rare earth prices, I think you've seen if you sort of model over time what margins in the magnet business have done versus rare earth prices. Magnet makers are pretty consistently been able to pass through with some lag, for sure, but I think our fundamental view as well though is, we certainly are not going to subsidize one piece of our business for the benefit of the other. I think, we feel very strongly that they need to stand alone and have their own economic returns and we'll proceed with that view. But the reason we feel good and are interested in this Stage II opportunity is the staying power of those margins and given our view of the scarcity, if rare earth prices continue to go up, our Stage II business will continue to benefit and we do not think that will come at the expense of a potential Stage III. And so I say that, that at a high level is sort of just how we think about that market.

[Benjamin Kallo, Baird]

Thank you. That's very good. Maybe two questions and one for you, Ryan, first. Just the leverage ratio that you're comfortable with going value and the structure. And then, James, for you, what are the benefits? Do you have many employees that have been working at the mine for a long time that are there and making sure that you guys are very successful? Then I think it's a huge benefit. And how do you make them feel okay to speed -- I mean -- but just make them feel okay because the mines are in hands of few different people over the years? And now, I'll stop there. Thanks guys.

[James Litinsky, Chairman & Chief Executive Officer]

Sure, I can probably take both of those or Ryan, you can chime in after. On leverage, I feel very strongly that the capital structure of the company needs to be appropriate for the business at the year-end. And certainly we are very mindful of that. We obviously are mindful of the history. And as you've probably heard me say ad nauseam, we want the leverage to be in the price, not on the balance sheet sort of speak. And I would say though that remember that we are, our Stage 1 business is generating cash. We obviously believe that our Stage II business will then be a significant uplift and so there is no doubt that we have made a lot of progress in the business over the last few years. But the power of an owner-operator culture is that we are large shareholders ourselves, we care and we want to make sure that we create long-term value. We're not looking to do anything to shortsighted. So, again the capital structure needs to be appropriate for the business and so hopefully that helps you on the leverage front.

And then on the employee front, it's a great question and actually it's an extension of what I just said, which is our owner-operator culture. One thing that people might not be aware, but as part of our public transaction in November, we gave every single non-employee of the -- every single -- sorry, every single non-executive employee of the company a $3,000 bonus as well as -- and that didn't matter your title or whatever, just every employee that's non-executive as well as we recently provided the opportunity for every single employee to be an owner. Everyone got granted 100 shares across. It doesn't matter -- again, doesn't matter your job, whether you're a mine worker or maintenance or receptionist, it doesn't matter. And so our intention as a company, as a culture is to be an owner-operator culture. And I think that we've -- I think we've delivered on our promises to the base out there of making sure that we're going to share in good fortune when it comes and we've been through a number of tough years and I think we've certainly delivered so far an outstanding result. And we are going to continue to work the way we always have to create a lot of value here and our employees, we expect to all participate on that and hopefully increasingly over time, but it's top of mind.

It's really important and I think particularly when you have an industrial enterprise that so reliant on your human capital, you need to treat them like owners. You need to treat them and make sure that they care. And I think that, that really pays dividends for shareholders because you have everybody of like mine that the goal is to create value here. There is no sort of distinction or pointing fingers of us versus them kind of mentality. And so, hopefully we will continue to get that piece of it right. And I think that as far as we can tell, everybody is very happy that we've been so successful and we think we have a long way to go and much success ahead and they'll participate in that upside.

[Benjamin Kallo, Baird]

Good stuff. Thank you very much.

[James Litinsky, Chairman & Chief Executive Officer]

Of course.

[Operator]

This concludes this conference call. Thanks for attending. You may now disconnect.

[James Litinsky, Chairman & Chief Executive Officer]

Thank you, everyone.