MP Materials Corp. / 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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☑
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 001-39277
mp-20220930_g1.jpg
MP MATERIALS CORP.
(Exact name of registrant as specified in its charter)
Delaware84-4465489
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
6720 Via Austi Parkway, Suite 450
Las Vegas, Nevada 89119
(702) 844-6111
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value of $0.0001 per shareMPNew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☑
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
As of November 1, 2022, the number of shares of the registrant’s common stock outstanding was 177,543,027.


MP MATERIALS CORP. AND SUBSIDIARIES
TABLE OF CONTENTS

i
References herein to the “Company,” “MP Materials,” “we,” “our,” and “us,” refer to MP Materials Corp. and its subsidiaries.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements included in this Quarterly Report on Form 10-Q for the three months ended September 30, 2022 (this “Form 10-Q”), that are not historical facts are forward-looking statements under Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements may be identified by the use of the words such as “estimate,” “plan,” “shall,” “may,” “project,” “forecast,” “intend,” “expect,” “anticipate,” “believe,” “seek,” “target,” or similar expressions that predict or indicate future events or trends or that are not statements of historical matters. These forward-looking statements include, but are not limited to, statements regarding estimates and forecasts of other financial and performance metrics and projections of market opportunity. These statements are based on various assumptions, whether or not identified in this Form 10-Q or our Annual Report on Form 10-K for the year ended December 31, 2021 (the “Form 10-K”), and on the current expectations of our management and are not predictions of actual performance. These forward-looking statements are provided for illustrative purposes only and are not intended to serve as, and must not be relied on by any investor as, a guarantee, an assurance, a prediction or a definitive statement of fact or probability. Actual events and circumstances are difficult or impossible to predict and will differ from assumptions. Many actual events and circumstances are beyond our control.
These forward-looking statements are subject to a number of risks and uncertainties, including:
•fluctuations and uncertainties related to demand for and pricing of rare earth products;
•uncertainties regarding the growth of existing and emerging uses for rare earth products and ability to compete with substitutions for rare earth minerals;
•the intense competition within the rare earth mining and processing industry;
•uncertainties relating to our commercial arrangements with Shenghe Resources (Singapore) International Trading Pte. Ltd., an affiliate of Shenghe Resources Holding Co., Ltd., a global rare earth company listed on the Shanghai Stock Exchange;
•potential changes in China’s political environment and policies;
•unanticipated costs or delays associated with our Stage II optimization project;
•unanticipated costs or delays associated with our Stage III project;
•risks associated with our intellectual property rights, including uncertainties related to the Company’s ability to obtain the intellectual property rights or licenses of intellectual property rights to produce NdFeB alloy and magnets;
•uncertainties related to the Company’s ability to produce and supply NdFeB alloy and magnets;
•the ability to convert current commercial discussions with customers for the sale of rare earth oxide products, NdFeB alloy and magnets into contracts;
•uncertainties relating to the COVID-19 pandemic;
•potential power shortages and interruptions at Mountain Pass;
•increasing costs or limited access to raw materials that may adversely affect our profitability;
•fluctuations in transportation costs or disruptions in transportation services;
•inability to meet individual customer specifications;
•diminished access to water;
•uncertainty in our estimates of rare earth oxide reserves;
•risks associated with work stoppages;
•a shortage of skilled technicians and engineers;
•loss of key personnel;
•risks associated with the inherent dangers involved in mining activity and metal and alloy manufacturing;
•risks associated with events outside of our control, such as natural disasters, climate change, wars or health epidemics or pandemics;
•risks related to technology systems and security breaches;
•ability to maintain satisfactory labor relations;
ii
•ability to comply with various government regulations that are applicable to our business;
•ability to maintain our governmental licenses, registrations, permits, and approvals necessary for us to operate our business;
•risks relating to extensive and costly environmental regulatory requirements;
•risks associated with the terms of our convertible notes; and
•the other factors described elsewhere in this Form 10-Q, included under the headings “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part II, Item 1A, “Risk Factors” or as described in our Form 10-K, or as described in the other documents and reports we file with the Securities and Exchange Commission (“SEC”).
If any of these risks materialize or our assumptions prove incorrect, actual results could differ materially from the results implied by these forward-looking statements.
These and other factors that could cause actual results to differ from those implied by the forward-looking statements in this Form 10-Q are more fully described within Part II, Item 1A, “Risk Factors” in this Form 10-Q and “Part I, Item 1A. Risk Factors” in our Form 10-K. Such risks are not exhaustive. New risk factors emerge from time to time, and it is not possible to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statements. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing cautionary statements. We undertake no obligations to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
In addition, statements of belief and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us, as applicable, as of the date of this Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain, and you are cautioned not to unduly rely upon these statements.

iii
PART I—FINANCIAL INFORMATION
ITEM 1.    FINANCIAL STATEMENTS
MP MATERIALS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, 2022December 31, 2021
(in thousands, except share and per share data)
Assets
Current assets
Cash and cash equivalents$427,969 $1,179,297 
Short-term investments836,288 — 
Total cash, cash equivalents and short-term investments1,264,257 1,179,297 
Accounts receivable (including related party), net of allowance for credit losses of $0 and $0, respectively
16,018 51,009 
Inventories61,645 38,692 
Income taxes receivable3,857 — 
Prepaid expenses and other current assets11,004 7,809 
Total current assets1,356,781 1,276,807 
Non-current assets
Property, plant and equipment, net830,033 610,612 
Other non-current assets2,348 2,247 
Total non-current assets832,381 612,859 
Total assets$2,189,162 $1,889,666 
Liabilities and stockholders’ equity
Current liabilities
Accounts payable and accrued liabilities$70,242 $35,734 
Income taxes payable— 3,463 
Current installments of long-term debt—related party
— 16,082 
Other current liabilities4,504 4,264 
Total current liabilities74,746 59,543 
Non-current liabilities
Asset retirement obligations5,244 17,615 
Environmental obligations16,584 16,598 
Long-term debt, net of current portion677,563 674,927 
Deferred income taxes167,028 104,500 
Other non-current liabilities5,691 7,751 
Total non-current liabilities872,110 821,391 
Total liabilities946,856 880,934 
Commitments and contingencies (Note 10)
Stockholders’ equity:
Preferred stock ($0.0001 par value, 50,000,000 shares authorized, none issued and outstanding in either period)
— — 
Common stock ($0.0001 par value, 450,000,000 shares authorized, 177,534,638 and 177,816,554 shares issued and outstanding, as of September 30, 2022, and December 31, 2021, respectively)
18 18 
Additional paid-in capital947,973 936,299 
Retained earnings294,412 72,415 
Accumulated other comprehensive loss(97)— 
Total stockholders’ equity1,242,306 1,008,732 
Total liabilities and stockholders’ equity$2,189,162 $1,889,666 
See accompanying notes to the Condensed Consolidated Financial Statements.
1
MP MATERIALS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the three months ended September 30,For the nine months ended September 30,
(in thousands, except share and per share data)2022202120222021
Revenue:
Product sales (including related party)$124,231 $98,581 $425,169 $230,842 
Other sales (including related party)214 1,173 9,096 2,001 
Total revenue124,445 99,754 434,265 232,843 
Operating costs and expenses:
Cost of sales (including related party)(excluding depreciation, depletion and amortization)
22,417 21,907 67,682 57,798 
Selling, general and administrative17,604 14,881 56,391 40,986 
Advanced projects, development and other2,743 1,327 6,229 2,436 
Depreciation, depletion and amortization2,096 6,951 12,763 19,767 
Accretion of asset retirement and environmental obligations418 595 1,255 1,780 
Write-down of inventories— — — 1,809 
Total operating costs and expenses45,278 45,661 144,320 124,576 
Operating income79,167 54,093 289,945 108,267 
Interest expense, net(1,224)(2,624)(4,455)(6,417)
Other income, net6,168 97 8,574 3,656 
Income before income taxes84,111 51,566 294,064 105,506 
Income tax expense(20,934)(8,803)(72,067)(19,458)
Net income$63,177 $42,763 $221,997 $86,048 
Earnings per share:
Basic$0.36 $0.24 $1.26 $0.50 
Diluted$0.33 $0.23 $1.16 $0.47 
Weighted-average shares outstanding:
Basic176,543,624 176,053,586 176,476,276 172,577,303 
Diluted193,409,857 193,215,313 193,438,939 188,639,373 
See accompanying notes to the Condensed Consolidated Financial Statements.
2
MP MATERIALS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
For the three months ended September 30,For the nine months ended September 30,
(in thousands)2022202120222021
Net income$63,177 $42,763 $221,997 $86,048 
Other comprehensive income (loss), net of tax:
Change in net unrealized gains (losses) on available-for-sale securities319 — (97)— 
Total comprehensive income$63,496 $42,763 $221,900 $86,048 
See accompanying notes to the Condensed Consolidated Financial Statements.
3
MP MATERIALS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)
Three months ended September 30, 2022 and 2021
Preferred StockCommon StockAdditional Paid-in CapitalRetained Earnings (Accumulated Deficit)Accumulated Other Comprehensive Loss
Total
Stockholders’
Equity
(in thousands, except share data)SharesAmountSharesAmount
Balance as of July 1, 2022— $— 177,534,132 $18 $939,900 $231,235 $(416)$1,170,737 
Stock-based compensation— — 506 — 8,073 — — 8,073 
Shares used to settle payroll tax withholding— — — — — — — — 
Net income— — — — — 63,177 — 63,177 
Unrealized gains on available-for-sale securities— — — — — — 319 319 
Balance as of September 30, 2022— $— 177,534,638 $18 $947,973 $294,412 $(97)$1,242,306 
Balance as of July 1, 2021— $— 177,748,487 $18 $925,944 $(19,337)$— $906,625 
Stock-based compensation— — — — 4,552 — — 4,552 
Shares used to settle payroll tax withholding— — (889)— (36)— — (36)
Net income— — — — — 42,763 — 42,763 
Other— — — — 291 — — 291 
Balance as of September 30, 2021— $— 177,747,598 $18 $930,751 $23,426 $— $954,195 
Nine months ended September 30, 2022 and 2021
Preferred StockCommon StockAdditional Paid-in CapitalRetained Earnings (Accumulated Deficit)Accumulated Other Comprehensive Loss
Total
Stockholders’
Equity
(in thousands, except share data)SharesAmountSharesAmount
Balance as of January 1, 2022— $— 177,816,554 $18 $936,299 $72,415 $— $1,008,732 
Stock-based compensation— — 60,691 — 25,970 — — 25,970 
Shares used to settle payroll tax withholding— — (342,607)— (14,296)— — (14,296)
Net income— — — — — 221,997 — 221,997 
Unrealized losses on available-for-sale securities— — — — — — (97)(97)
Balance as of September 30, 2022— $— 177,534,638 $18 $947,973 $294,412 $(97)$1,242,306 
Balance as of January 1, 2021— $— 170,719,979 $17 $916,482 $(62,622)$— $853,877 
Redemption of Public Warrants— — 7,080,005 1 (2)— — (1)
Stock-based compensation— — 54,722 — 14,723 — — 14,723 
Forfeiture of restricted stock— — (90,000)— — — — — 
Shares used to settle payroll tax withholding— — (17,108)— (563)— — (563)
Net income— — — — — 86,048 — 86,048 
Other— — — — 111 — — 111 
Balance as of September 30, 2021— $— 177,747,598 $18 $930,751 $23,426 $— $954,195 
See accompanying notes to the Condensed Consolidated Financial Statements.
4
MP MATERIALS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the nine months ended September 30,
(in thousands)20222021
Operating activities:
Net income$221,997 $86,048 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion and amortization12,763 19,767 
Accretion of asset retirement and environmental obligations1,255 1,780 
Accretion of discount on short-term investments(3,921)— 
Gain on forgiveness of Paycheck Protection Loan— (3,401)
Loss on sale or disposal of long-lived assets, net258 219 
Stock-based compensation expense25,019 14,723 
Accretion of debt discount and amortization of debt issuance costs3,153 5,388 
Write-down of inventories— 1,809 
Revenue recognized in exchange for debt principal reduction(13,566)(38,858)
Deferred income taxes62,561 11,262 
Decrease (increase) in operating assets:
Accounts receivable (including related party)34,991 (33,506)
Inventories(22,386)(3,663)
Income taxes receivable(3,857)— 
Prepaid expenses, other current and non-current assets1,339 (2,352)
Increase (decrease) in operating liabilities:
Accounts payable and accrued liabilities(1,271)4,304 
Income taxes payable(3,463)8,097 
Other current and non-current liabilities(453)(1,153)
Net cash provided by operating activities314,419 70,464 
Investing activities:
Additions to property, plant and equipment(214,332)(86,420)
Purchases of short-term investments(1,358,390)— 
Proceeds from sales of short-term investments313,865 — 
Proceeds from maturities of short-term investments212,000 — 
Proceeds from sale of property, plant and equipment— 125 
Proceeds from government awards used for construction5,130 2,615 
Net cash used in investing activities(1,041,727)(83,680)
Financing activities:
Proceeds from issuance of long-term debt
— 690,000 
Principal payments on debt obligations and finance leases(5,139)(1,707)
Payment of debt issuance costs— (17,749)
Tax withholding on stock-based awards(14,296)(563)
Other— (371)
Net cash provided by (used in) financing activities(19,435)669,610 
Net change in cash, cash equivalents and restricted cash(746,743)656,394 
Cash, cash equivalents and restricted cash beginning balance1,181,157 532,440 
Cash, cash equivalents and restricted cash ending balance$434,414 $1,188,834 
Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents$427,969 $1,179,371 
Restricted cash, current5,915 339 
Restricted cash, non-current530 9,124 
Total cash, cash equivalents and restricted cash$434,414 $1,188,834 
See accompanying notes to the Condensed Consolidated Financial Statements.
5
MP MATERIALS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1—DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business: MP Materials is the largest producer of rare earth materials in the Western Hemisphere. We own and operate the Mountain Pass Rare Earth Mine and Processing Facility (“Mountain Pass”), the only rare earth mining and processing site of scale in North America. The Company is headquartered in Las Vegas, Nevada. References herein to the “Company,” “we,” “our,” and “us,” refer to MP Materials Corp. and its subsidiaries.
We currently produce a rare earth concentrate that we sell pursuant to an offtake agreement to Shenghe Resources (Singapore) International Trading Pte. Ltd. (“Shenghe”), a majority-owned subsidiary of Leshan Shenghe Rare Earth Co., Ltd. (“Leshan Shenghe”) whose ultimate parent is Shenghe Resources Holding Co., Ltd., a leading global rare earth company listed on the Shanghai Stock Exchange. We are currently recommissioning, upgrading and enhancing the processing facility at Mountain Pass to provide for the separation of the individual rare earth elements contained in our concentrate (referred to as the “Stage II optimization project” or “Stage II”), that will allow us to sell separated rare earth oxides directly to end users. Additionally, in the first quarter of 2022, we began construction on our initial rare earth, metal, alloy and magnet manufacturing facility in Fort Worth, Texas (the “Fort Worth Facility”) as a part of our Stage III downstream expansion strategy (“Stage III”). For more information on our relationship and agreements with Shenghe, see Note 3, “Relationship and Agreements with Shenghe,” and Note 14, “Related-Party Transactions.”
In April 2022, the Company entered into a definitive long-term supply agreement with General Motors Company (NYSE: GM) (“GM”) to supply U.S.-sourced and manufactured rare earth materials, alloy and finished magnets for the electric motors in more than a dozen models using GM’s Ultium Platform, with a gradual production ramp that is expected to begin in late 2023, starting with alloy. The definitive long-term supply agreement finalized the terms of a binding agreement announced by the Company in December 2021.
Operating segments are defined as components of an enterprise about which separate financial information is available and evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker views the Company’s operations and manages the business as one reportable segment.
The cash flows and profitability of the Company’s operations are significantly affected by the market price of rare earth products. The prices of rare earth products are affected by numerous factors beyond the Company’s control. The products of the Company are sold globally, with a primary focus in the Asian market due to the refining capabilities of the region. Rare earth products are critical inputs in hundreds of existing and emerging clean-tech applications including electric vehicles and wind turbines as well as drones and defense applications.
Basis of Presentation: The unaudited Condensed Consolidated Financial Statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and with the rules and regulations of the U.S. Securities and Exchange Commission. Accordingly, they do not include all of the information and notes required by GAAP for complete consolidated financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.
Results of operations and cash flows for the interim periods presented herein are not necessarily indicative of the results that would be achieved during a full year of operations or in future periods. These unaudited Condensed Consolidated Financial Statements and notes thereto should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
NOTE 2—SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The unaudited Condensed Consolidated Financial Statements include the accounts of MP Materials Corp. and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates: The preparation of the unaudited Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) the disclosure of contingent assets and liabilities at the date of the unaudited Condensed Consolidated Financial Statements, and (iii) the reported amounts of revenues and expenses during the reporting period. Accordingly, actual results may differ from those estimates.
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Concentration of Risk: Financial instruments that potentially subject the Company to credit risk consist principally of cash and cash equivalents, short-term investments and trade accounts receivable. The Company believes that its credit risk is limited because the Company’s current contracts are with companies with a reliable payment history. The Company does not believe that it is exposed to any significant risks related to its cash accounts, money market funds, or short-term investments.
As of September 30, 2022, Shenghe, a related party of the Company and our principal customer, accounted for more than 90% of product sales. Furthermore, while revenue is generated in the United States, Shenghe conducts its primary operations in China and may transport and sell products in the Chinese market. Therefore, the Company’s revenue is affected by Shenghe’s ultimate realized prices in China, including the impact of changes in the exchange rate between the Chinese Yuan and the U.S. dollar. In addition, there is an ongoing economic conflict between China and the United States that has resulted in tariffs and trade barriers that may negatively affect the Company’s business and results of operations. See Note 3, “Relationship and Agreements with Shenghe,” for additional information.
The COVID-19 pandemic remains on-going and continues to impact the global economy. Varying degrees of preventative measures are still in place in China and other parts of the world, including city-wide lockdowns, travel restrictions, closures of non-essential businesses and other quarantine measures. In particular, preventative measures remain prevalent in China as a result of the Chinese government’s “Zero-COVID” policy. Since the first quarter of 2020, we have experienced, at times, significant shipping delays due to congestion and slowdowns at U.S. and international ports caused by shortages in vessels, containers, and truckers, also disrupting the global supply chain. Congestion and slowdowns have affected and may continue to affect the capacity at ports to receive deliveries of products or the loading of shipments onto vessels. Despite these factors, we have not experienced a reduction in production or sales due to the COVID-19 pandemic; however, the COVID-19 pandemic has contributed to certain cost and schedule pressures on the Stage II optimization project. The Company has worked proactively and diligently to adjust working schedules and hours to optimize logistics and shipping, which has thus far prevented a significant negative impact on our product sales and has mitigated certain impacts on Stage II construction and recommissioning progress.
As the situation continues to evolve, including as a result of new and potential future variants of COVID-19, the possibility of federal or state mandates on vaccinations, or other factors that may affect international shipping and logistics or involve responses to government actions such as strikes or other disruptions, it is impossible to predict the effect and ultimate impact of the COVID-19 pandemic on the Company’s business, results of operations, production and sales volumes, or growth projects. Accordingly, the extent and duration of any business disruptions, and related financial impact, cannot be estimated at this time.
Cash, Cash Equivalents and Short-term Investments: Cash and cash equivalents consist of all cash balances and highly liquid investments, including U.S. treasury and agency securities, with a maturity of three months or less at the time of purchase.
The Company’s short-term investments consist of U.S. treasury and agency securities that have original maturities greater than three months at the time of purchase. These investments have been classified and accounted for as available-for-sale securities and the Company reevaluates the classification each reporting period. The Company classifies its available-for-sale securities as either current or non-current based on each instrument’s underlying contractual maturity date and the Company’s expectations of sales and redemptions within the next twelve months. See Note 4, “Cash, Cash Equivalents and Investments,” for additional information.
Available-for-sale securities are recorded at fair value each reporting period. For unrealized losses in securities that the Company intends to hold and will not more likely than not be required to sell before recovery, the Company further evaluates whether declines in fair value below amortized cost are due to credit or non-credit related factors. The Company considers credit related impairments to be changes in value that are driven by a change in the creditor’s ability to meet its payment obligations, and records an allowance and recognizes a corresponding loss when the impairment is incurred.
Unrealized non-credit related losses and unrealized gains are reported, net of income taxes, in “Accumulated other comprehensive income or loss” within the Company’s unaudited Condensed Consolidated Balance Sheets, until realized. Realized gains and losses are determined based on the specific identification method and are reported in “Other income, net” within the Company’s unaudited Condensed Consolidated Statements of Operations upon realization. Premiums and discounts are amortized or accreted over the life of the related available-for-sale security as an adjustment to yield using the straight-line method. Interest income is recognized when earned. These amounts are reported in “Other income, net” within the Company’s unaudited Condensed Consolidated Statements of Operations. Accrued interest receivable is included in “Accounts receivable (including related party)” within the Company’s unaudited Condensed Consolidated Balance Sheets.
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Recently Issued Accounting Pronouncements: There were no new accounting pronouncements recently issued or effective during the three and nine months ended September 30, 2022, that had or would be expected to have a material impact on the Company’s unaudited Condensed Consolidated Financial Statements.
Reclassifications: Certain amounts in prior periods have been reclassified to conform to the current year presentation.
NOTE 3—RELATIONSHIP AND AGREEMENTS WITH SHENGHE
Offtake Agreement
In March 2022, the Company entered into an offtake agreement with Shenghe (the “Offtake Agreement”), which became effective upon the termination of the A&R Offtake Agreement (as discussed and defined below). The initial term of the Offtake Agreement is two years, with the option to extend the term at the Company’s discretion for an additional one-year period.
Pursuant to the Offtake Agreement, and subject to certain exclusions, Shenghe shall purchase on a “take or pay” basis the rare earth concentrate produced by the Company as the exclusive distributor in China, with certain exceptions for the Company’s direct sales globally. In addition, at the discretion of the Company, Shenghe may be required to purchase on a “take or pay” basis certain non-concentrate rare earth products, although the Company may sell all non-concentrate rare earth products in its sole discretion to customers or end users in any jurisdiction. Under the Offtake Agreement, Shenghe will be paid a variable commission on net proceeds to the Company.
Similar to the A&R Offtake Agreement, the sales price of rare earth concentrate sold to Shenghe is based on an agreed-upon price per metric ton, subject to certain quality adjustments depending on the measured characteristics of the product, with an adjustment for the ultimate market price of the product realized by Shenghe upon sales to their customers. The sales price and other terms applicable to a quantity of offtake products are set forth in monthly purchase agreements between the Company and Shenghe.
Original Commercial Agreements
In May 2017, the Company entered into a set of commercial arrangements with Shenghe, which included a technical services agreement (the “TSA”) and an offtake agreement (the “Original Offtake Agreement”). The Original Offtake Agreement required Shenghe to advance the Company an initial $50.0 million (the “Initial Prepayment Amount”) to fund the restart of operations at the mine and the TSA required Shenghe to fund any additional operating and capital expenditures required to bring Mountain Pass to full operability. Shenghe also agreed to provide additional funding of $30.0 million to the Company pursuant to a separate letter agreement dated June 20, 2017 (the “Letter Agreement”) (the “First Additional Advance”), in connection with our acquisition of Mountain Pass. In addition to the repayment of the First Additional Advance, pursuant to the Letter Agreement, the Initial Prepayment Amount increased by $30.0 million. We refer to the aggregate prepayments made by Shenghe pursuant to the Original Offtake Agreement and the Framework Agreement (defined below), as adjusted for Gross Profit Recoupment (defined below) amounts and any other qualifying repayments to Shenghe, inclusive of the $30.0 million increase to the Initial Prepayment Amount, as the “Prepaid Balance.”
Under the Original Offtake Agreement, we sold to Shenghe, and Shenghe purchased on a firm “take or pay” basis, all of the rare earth products produced at Mountain Pass. Shenghe marketed and sold these products to customers, and retained the gross profits earned on subsequent sales. The gross profits were credited against the Prepaid Balance, and provided the means by which we repaid, and Shenghe recovered, such amounts (the “Gross Profit Recoupment”).
Framework Agreement and Restructured Commercial Agreements
In May 2020, the Company entered into a framework agreement and amendment (the “Framework Agreement”) with Shenghe and Leshan Shenghe that restructured the commercial arrangements and provided for, among other things, a revised funding amount and schedule to settle Shenghe’s prepayment obligations to the Company, as well as an amendment to the Original Offtake Agreement, as discussed below.
Pursuant to the Framework Agreement, the Company entered into an amended and restated offtake agreement with Shenghe on May 19, 2020 (the “A&R Offtake Agreement”), which, upon effectiveness, superseded and replaced the Original Offtake Agreement. Pursuant to the Framework Agreement, Shenghe funded the remaining portion of the Initial Prepayment Amount and agreed to fund an additional $35.5 million advance (the “Second Additional Advance” and together with the Initial Prepayment Amount, inclusive of the $30.0 million increase pursuant to the Letter Agreement, the “Offtake Advances”), which amounts were fully funded in June 2020.
8
The A&R Offtake Agreement maintained the key take-or-pay, amounts owed on actual and deemed advances from Shenghe, and other terms of the Original Offtake Agreement, with the following changes, among other items: (i) as to the offtake products subject to the A&R Offtake Agreement, provided that if we sold such offtake products to a third party, then, until the Prepaid Balance was reduced to zero, we would pay an agreed percentage of our revenue from such sales to Shenghe, to be credited against the amounts owed on Offtake Advances; (ii) provided that the sales price to be paid by Shenghe for our rare earth products (a portion of which reduces the Prepaid Balance rather than being paid in cash) would be based on market prices (net of taxes, tariffs and certain other agreed charges) less applicable discounts; and (iii) obliged us to pay Shenghe, on an annual basis, an amount equal to our annual net income, less any amounts recouped through the Gross Profit Recoupment mechanism over the course of the year, until the Prepaid Balance was reduced to zero.
The sales price and other terms applicable to a quantity of offtake products were set forth in monthly purchase agreements between the Company and Shenghe. In March 2022, the Company made a $2.9 million payment to Shenghe pursuant to item (iii) discussed above. Upon payment by the Company, the Prepaid Balance was repaid in full, and the A&R Offtake Agreement was terminated.
NOTE 4—CASH, CASH EQUIVALENTS AND INVESTMENTS
The following table presents the Company’s cash, cash equivalents and short-term investments:
September 30, 2022December 31, 2021
(in thousands)Amortized Cost BasisUnrealized GainsUnrealized LossesEstimated Fair ValueAmortized Cost BasisUnrealized GainsUnrealized LossesEstimated Fair Value
Cash:
Demand deposits$18,630 $— $— $18,630 $26,536 $— $— $26,536 
Cash equivalents:
Money market funds243,602 — — 243,602 1,152,761 — — 1,152,761 
U.S. agency securities49,985 5 — 49,990 — — — — 
U.S. Treasury securities115,724 23 — 115,747 — — — — 
Total cash equivalents409,311 28 — 409,339 1,152,761 — — 1,152,761 
Total cash and equivalents427,941 28 — 427,969 1,179,297 — — 1,179,297 
Short-term investments:
U.S. agency securities225,463 8 (3)225,468 — — — — 
U.S. Treasury securities610,983 56 (219)610,820 — — — — 
Total short-term investments836,446 64 (222)836,288 — — — — 
Total cash, cash equivalents and short-term investments$1,264,387 $92 $(222)$1,264,257 $1,179,297 $— $— $1,179,297 
The Company does not intend to sell, nor is it more likely than not that the Company will be required to sell, any investments in unrealized loss positions before recovery of their amortized cost basis. We did not recognize any credit losses related to our available-for-sale investments during the three and nine months ended September 30, 2022. The unrealized losses on our available-for-sale investments were primarily due to unfavorable changes in interest rates subsequent to initial purchase. None of the available-for-sale investments held as of September 30, 2022, were in a continuous unrealized loss position for greater than 12 months and the unrealized losses and the related risk of expected credit losses were not material. We recognized $0.1 million of gross realized gains and $0.2 million of gross realized losses during the three and nine months ended September 30, 2022.
As of September 30, 2022, all outstanding available-for-sale securities were due within one year.
9
NOTE 5—INVENTORIES
The Company’s inventories consisted of the following:
September 30, 2022December 31, 2021
(in thousands)
Materials and supplies(1)
$27,892 $10,711 
In-process
31,057 25,574 
Finished goods
2,696 2,407 
Total inventory$61,645 $38,692 
(1)Includes materials acquired during the third quarter of 2022 to support activities pertaining to the Company’s rare earth metal, alloy and magnet manufacturing facility as a part of Stage III.
During the second quarter of 2021, the Company recognized a non-cash write-down of a portion of its legacy low-grade stockpile inventory of $1.8 million, after determining that it contained a significant amount of alluvial material that did not meet the Company’s requirement for mill feed and, as a result, was deemed unusable. The write-down is included in the unaudited Condensed Consolidated Statements of Operations for the nine months ended September 30, 2021, as “Write-down of inventories.” No write-down of inventories was recorded for the three and nine months ended September 30, 2022.
NOTE 6—PROPERTY, PLANT AND EQUIPMENT
The Company’s property, plant and equipment consisted of the following:
September 30, 2022December 31, 2021
(in thousands)
Land and land improvements$16,231 $7,925 
Buildings and building improvements9,263 8,791 
Machinery and equipment67,479 61,822 
Assets under construction352,646 134,327 
Mineral rights438,395 437,376 
Property, plant and equipment, gross884,014 650,241 
Less: Accumulated depreciation and depletion(53,981)(39,629)
Property, plant and equipment, net$830,033 $610,612 
Additions to Property, Plant and Equipment: The Company capitalized expenditures related to property, plant and equipment of $250.1 million and $93.8 million for the nine months ended September 30, 2022 and 2021, respectively, including amounts not yet paid (see Note 15, “Supplemental Cash Flow Information”). The capitalized expenditures for the nine months ended September 30, 2022, related to assets under construction to support the Company’s Stage II optimization project and its rare earth metal, alloy and magnet manufacturing facility as a part of Stage III, including the purchase of approximately 18 acres of land in Fort Worth, Texas, in February 2022. The capitalized expenditures for the nine months ended September 30, 2021, mostly related to vehicles, machinery, equipment, and assets under construction to support the Stage II optimization project and other capital projects at Mountain Pass.
Government Awards: In November 2020, the Company was awarded a Defense Production Act Title III technology investment agreement (“TIA”) from the Department of Defense (“DOD”) to establish domestic processing for separated light rare earth elements in the amount of $9.6 million. During the nine months ended September 30, 2022 and 2021, pursuant to the TIA, the Company has received $5.1 million and $2.6 million, respectively, in reimbursements from the DOD. The funds received reduced the carrying amount of certain fixed assets associated with the Company’s Stage II optimization project, which are currently included in “Assets under construction.” As of September 30, 2022, the Company is entitled to receive an additional $0.1 million from the DOD under the TIA.
In February 2022, the Company was awarded a $35.0 million contract by the DOD’s Office of Industrial Base Analysis and Sustainment Program to design and build a facility to process heavy rare earth elements (“HREE”) at Mountain Pass (the “HREE Production Project Agreement”). The Company must utilize the funds to acquire property and equipment that will contribute to commercial-scale production of separated HREE at Mountain Pass. The Company will be paid fixed amounts upon the completion of certain project milestones. In exchange for these funds, the DOD will have certain rights to technical data following the completion of the project. The funds received pursuant to the HREE Production Project Agreement will
10
reduce the carrying amount of the fixed assets associated with the Company’s HREE separations facility, which will tie into the Company’s other Stage II facilities.
Change in Estimates of Asset Retirement Costs: As a result of a decrement to the Company’s asset retirement obligations (“ARO”) during the third quarter of 2022, the carrying amount of the Company’s total property, plant and equipment was reduced by $10.4 million, the majority of which pertained to buildings, machinery and equipment, and assets under construction, in the amounts of $0.6 million, $2.7 million and $6.7 million, respectively. Additionally, the Company’s depreciation expense for the three and nine months ended September 30, 2022, was reduced by $2.7 million, reflecting the excess of the decrement over the carrying amount of the related property, plant and equipment. See Note 8, “Asset Retirement and Environmental Obligations,” for further information on the decrement.
The Company’s depreciation and depletion expense were as follows:
For the three months ended September 30,For the nine months ended September 30,
(in thousands)2022202120222021
Depreciation expense(1)
$(656)$2,109 $3,702 $5,528 
Depletion expense$2,664 $4,754 $8,808 $13,971 
(1)As noted above, during the three months ended September 30, 2022, we recorded a reduction to depreciation expense, reflecting the excess of the ARO decrement over the carrying amount of the related property, plant and equipment, as a result of changes in our estimates of cash flows underlying our ARO.
There were no impairments recognized for the three and nine months ended September 30, 2022 and 2021.
NOTE 7—DEBT OBLIGATIONS
The Company’s current and non-current portions of long-term debt were as follows:
September 30, 2022December 31, 2021
(in thousands)
Long-term debt
Convertible Notes due 2026$690,000 $690,000 
Less: Unamortized debt issuance costs(12,437)(15,073)
Net carrying amount677,563 674,927 
Less: Current installments of long-term debt— — 
Long-term debt, net of current portion$677,563 $674,927 
Long-term debt to related party
Offtake Advances$— $16,599 
Less: Unamortized debt discount— (517)
Net carrying amount— 16,082 
Less: Current installments of long-term debt to related party— (16,082)
Long-term debt to related party, net of current portion$— $— 
Convertible Notes
In March 2021, the Company issued $690.0 million aggregate principal amount of 0.25% unsecured green convertible senior notes that mature, unless earlier converted, redeemed or repurchased, on April 1, 2026 (the “Convertible Notes”), at a price of par. Interest on the Convertible Notes is payable on April 1st and October 1st of each year, beginning on October 1, 2021. The Convertible Notes may, at the Company’s election, be settled in cash, shares of common stock of the Company, or a combination thereof. The Company has the option to redeem the Convertible Notes, in whole or in part, beginning on April 5, 2024.
The Convertible Notes are convertible into shares of the Company’s common stock at an initial conversion price of $44.28 per share, or 22.5861 shares, per $1,000 principal amount of notes, subject to adjustment upon the occurrence of certain corporate events. However, in no event will the conversion price exceed 28.5714 shares of common stock per $1,000 principal
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amount of notes. As of September 30, 2022, based on the conversion price, the maximum number of shares that could be issued to satisfy the conversion feature of the Convertible Notes was 19,714,266. The Convertible Notes’ if-converted value did not exceed its principal amount as of September 30, 2022.
Interest expense related to the Convertible Notes was as follows:
For the three months ended September 30,For the nine months ended September 30,
(in thousands)2022202120222021
Coupon interest$431 $431 $1,293 $886 
Amortization of debt issuance costs881 876 2,637 1,799 
Convertible Notes interest expense$1,312 $1,307 $3,930 $2,685 
The debt issuance costs are being amortized to interest expense over the term of the Convertible Notes at an effective interest rate of 0.51%. The remaining term of the Convertible Notes was 3.5 years as of September 30, 2022.
Offtake Advances
Under the A&R Offtake Agreement, a portion of the sales prices of products sold to Shenghe was paid in the form of debt reduction, rather than cash. In addition, the Company had to pay the following amounts to Shenghe in cash to reduce the debt obligation until repaid in full: (i) an agreed-upon percentage of sales of products to parties other than Shenghe under the A&R Offtake Agreement; (ii) 100% of net profits from asset sales; and (iii) 100% of net income determined under GAAP, less the tax-effected amount of total non-cash recoupment from sales of products to Shenghe. For the three and nine months ended September 30, 2022, zero and $14.2 million, respectively, of the sales prices of products sold to Shenghe was paid in the form of debt reduction (see Note 15, “Supplemental Cash Flow Information”), as compared to $15.9 million and $36.8 million, for the three and nine months ended September 30, 2021, respectively. During the three and nine months ended September 30, 2022, the Company made payments to Shenghe of zero and $0.2 million, respectively, based on sales to other parties, as compared to $0.1 million and $0.2 million, respectively, for the three and nine months ended September 30, 2021. No amounts were required to be paid based on asset sales.
The A&R Offtake Agreement did not have a stated rate (and was non-interest-bearing), and repayment was contingent on a number of factors, including market prices realized by Shenghe, the Company’s sales to other parties, asset sales, and the Company’s annual net income. The imputed interest rate was a function of this discount taken together with our expectations about the timing of the anticipated reductions of the principal balance. The Company had determined that it would recognize adjustments from these estimates following a prospective method where the Company updated its estimate of the effective interest rate in future periods based on revised estimates of the timing of remaining principal reductions at that time. The effective rate applicable from the June 5, 2020, inception to full repayment, was between 4.41% and 24.75%.
As discussed in Note 3, “Relationship and Agreements with Shenghe,” the Company made a $2.9 million payment to Shenghe in March 2022. Upon payment by the Company, the Prepaid Balance was repaid in full, and the A&R Offtake Agreement was terminated.
Paycheck Protection Loan
In April 2020, the Company obtained a loan of $3.4 million pursuant to the Paycheck Protection Program under the CARES Act, (the “Paycheck Protection Loan”). In June 2021, the Company received notification from the Small Business Administration that the Paycheck Protection Loan and related accrued interest was forgiven. Consequently, during the nine months ended September 30, 2021, the Company recorded a gain on forgiveness of the Paycheck Protection Loan in the amount of $3.4 million, which is included in “Other income, net” within our unaudited Condensed Consolidated Statements of Operations.
Tariff-Related Rebates
In May 2020, the government of the People’s Republic of China suspended certain tariffs that had been charged to consignees of our product on imports, and provided such relief retroactive to March 2020. In addition, Shenghe began negotiating for tariff rebates from sales prior to March 2020, which affected Shenghe’s realized prices, and thus the Prepaid Balance. These, in turn, affected the Company’s realized prices on prior sales. While additional tariff rebates were possible, the Company did not have insight into Shenghe’s negotiations or their probability of success, and such negotiations were outside of the Company’s control. Thus, the Company fully constrained estimates of any future tariff rebates that may have been realized
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at that time.
In January 2021, the Company received information from Shenghe regarding its successful negotiation of additional tariff rebates. Consequently, the Company revised its estimates of variable consideration and recognized $2.0 million of revenue for the nine months ended September 30, 2021. Additionally, for the nine months ended September 30, 2021, the Company recorded a reduction in the principal balance of the debt obligation and the corresponding debt discount of $2.2 million and $0.2 million, respectively.
Equipment Notes
The Company has entered into several financing agreements for the purchase of equipment, including trucks, tractors, loaders, graders, and various other machinery. The Company’s equipment notes, which are secured by the purchased equipment, have terms of between 4 to 5 years and interest rates of between 0.0% and 6.5% per annum.
The current and non-current portions of the equipment notes, which are included within the unaudited Condensed Consolidated Balance Sheets in “Other current liabilities” and “Other non-current liabilities,” respectively, were as follows:
September 30, 2022December 31, 2021
(in thousands)
Equipment notes
Current$2,423 $2,566 
Non-current5,340 7,095 
$7,763 $9,661 
As of September 30, 2022, none of the agreements or indentures governing our indebtedness contain financial covenants.
NOTE 8—ASSET RETIREMENT AND ENVIRONMENTAL OBLIGATIONS
Asset Retirement Obligations
The Company estimates ARO based on the requirements to reclaim certain land and facilities associated with mining activity at Mountain Pass. Minor reclamation activities related to discrete portions of the Company’s operations are ongoing. As of September 30, 2022, the Company estimated a significant portion of the cash outflows for the major reclamation and the retirement of Mountain Pass will be incurred beginning in 2057.
In June 2021, San Bernardino County approved the Company’s re-zoning request for certain of its properties such that certain of the Company’s processing and separations facilities would be zoned for industrial end uses as opposed to the prior “resource conservation” designation. In September 2022, and as a result of the re-zoning of this land, the Company received final approval from San Bernardino County and the Division of Mine Reclamation (California) on a revised reclamation plan. The revision removed from the regulatory oversight under The Surface Mining and Reclamation Act of 1975 the majority of the buildings and equipment used in the processing and separations facilities, including the land underlying such buildings and equipment.
As a result of the final county approval, in the third quarter of 2022, the Company revised its estimated cash flows pertaining to the settlement of the reclamation and removal activities associated with Mountain Pass, including removing the previous estimates of the cash flows associated with the processing and separations facilities that no longer require reclamation. The changes in estimates resulted in an ARO decrement of $13.1 million, of which $10.4 million reduced the carrying amounts of the associated property, plant and equipment, and $2.7 million, reflecting the excess of the decrement over the carrying amount of the related property, plant and equipment, was recorded as a reduction to depreciation expense for the three and nine months ended September 30, 2022.
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The following is a summary of the Company’s ARO:
September 30, 2022December 31, 2021
(in thousands)
Beginning balance$17,757 $25,646 
Obligations settled(123)(199)
Accretion expense879 1,876 
Additional ARO— 213 
Revisions in estimated cash flows(13,114)(9,779)
Ending balance$5,399 $17,757 
As of September 30, 2022, the credit-adjusted risk-free rate ranged between 6.5% and 12.0% depending on the timing of expected settlement and when the layer or increment was recognized. There were no significant increments for the three and nine months ended September 30, 2022, and there were no significant increments or decrements for the three and nine months ended September 30, 2021.
The balance as of September 30, 2022, and December 31, 2021, included current portions of $0.2 million and $0.1 million, respectively. The total estimated future undiscounted cash flows required to satisfy the asset retirement obligations were $50.4 million and $167.3 million as of September 30, 2022, and December 31, 2021, respectively.
Environmental Obligations
The Company assumed certain environmental remediation liabilities related to the monitoring of groundwater contamination. The Company engaged an environmental consultant to develop a remediation plan and remediation cost projections based upon that plan. Utilizing the remediation plan developed by the environmental consultant, management developed an estimate of future cash payments for the remediation plan.
As of September 30, 2022, management estimated the cash outflows related to these environmental activities will be incurred annually over the next 25 years. The Company’s environmental remediation liabilities are measured at the expected value of future cash outflows discounted to their present value using a discount rate of 2.93%. There were no significant changes in the estimated remaining remediation costs for the three and nine months ended September 30, 2022 and 2021.
The total estimated aggregate undiscounted cost of $27.3 million and $27.7 million as of September 30, 2022, and December 31, 2021, respectively, was principally related to water monitoring and treatment activities required by state and local agencies. Based on management’s best estimate of the cost and timing and the assumption that payments are considered to be fixed and reliably determinable, the Company has discounted the liability. The balance as of September 30, 2022, and December 31, 2021, included current portions of $0.5 million.
Financial Assurances
The Company is required to provide the applicable government agencies with financial assurances relating to the closure and reclamation obligations. As of September 30, 2022, and December 31, 2021, the Company had financial assurance requirements of $43.4 million and $39.0 million, respectively, which were satisfied with surety bonds placed with the California state and regional agencies.
NOTE 9—INCOME TAXES
The Company calculates the provision for income taxes during interim reporting periods by applying an estimate of the annual effective tax rate to its year-to-date pretax book income or loss. The tax effects of discrete items, including but not limited to, excess tax benefits associated with stock-based compensation, valuation allowance adjustments based on new evidence and enactment of tax laws, are reported in the interim period in which they occur. The effective tax rate (income taxes as a percentage of income or loss before income taxes) including discrete items was 24.9% and 24.5% for the three and nine months ended September 30, 2022, respectively, as compared to 17.1% and 18.4% for the three and nine months ended September 30, 2021, respectively. Our effective income tax rate can vary from period to period depending on, among other factors, percentage depletion, executive compensation deduction limitations, other permanent book/tax items, and changes to our valuation allowance against deferred tax assets. Certain of these and other factors, including our history and projections of pretax earnings, are considered in assessing our ability to realize our net deferred tax assets.
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On August 16, 2022, the U.S. government enacted the Inflation Reduction Act of 2022 which, among other things, implements a 15% minimum tax on book income of certain large corporations, a 1% excise tax on net stock repurchases, and provides several tax incentives to promote clean energy for tax years beginning after December 31, 2022. At this time, we do not expect the minimum tax or excise tax to have a material impact on our unaudited Condensed Consolidated Financial Statements. We are continuing to evaluate the impact of the clean energy incentives.
NOTE 10—COMMITMENTS AND CONTINGENCIES
Litigation: The Company may become party to lawsuits, administrative proceedings and government investigations, including environmental, regulatory, and other matters, in the ordinary course of business. Large, and sometimes unspecified, damages or penalties may be sought in some matters, and certain matters may require years to resolve. The Company is not aware of any pending or threatened litigation that would have a material adverse effect on its unaudited Condensed Consolidated Financial Statements.
In January 2019, a former employee filed a complaint with the California Labor & Workforce Development Agency alleging numerous violations of California labor law, and subsequently filed a representative action against the Company. In October 2021, we entered into a memorandum of understanding to settle the lawsuit in the amount of $1.0 million, including legal fees, which is included in “Selling, general and administrative” within the unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2021. In August 2022, the court granted final approval of the class settlement, and in September 2022, the Company paid the settlement amount.
NOTE 11—STOCK-BASED COMPENSATION
2020 Incentive Plan: In November 2020, the Company’s stockholders approved the MP Materials Corp. 2020 Stock Incentive Plan (the “2020 Incentive Plan”), which permits the Company to issue stock options (incentive and/or non-qualified); stock appreciation rights; restricted stock, restricted stock units, and other stock awards; and performance awards. As of September 30, 2022, there were 6,454,233 shares available for future grants under the 2020 Incentive Plan.
Stock-Based Compensation: During the three and nine months ended September 30, 2022, the Company recognized $7.8 million and $25.0 million, respectively, of stock-based compensation expense, as compared to $4.5 million and $14.7 million for the three and nine months ended September 30, 2021, respectively, which is principally included in the unaudited Condensed Consolidated Statements of Operations in “Selling, general and administrative.” Additionally, during the three and nine months ended September 30, 2022, the Company capitalized $0.3 million and $1.0 million, respectively, of stock-based compensation to “Property, plant and equipment, net.” No stock-based compensation was capitalized to “Property, plant and equipment, net” during the three and nine months ended September 30, 2021.
NOTE 12—FAIR VALUE MEASUREMENTS
ASC Topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”), establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:
Level 1Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2Quoted prices in markets that are not active, quoted prices for similar assets or liabilities in active markets, quoted prices or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability and model-based valuation techniques (e.g., the Black-Scholes model) for which all significant inputs are observable in active markets.
Level 3Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).
The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of assets and liabilities and their placement within the fair value hierarchy. The following methods and assumptions are used to estimate the fair value of each class of financial instruments for which it is practicable to estimate. The fair value of the Company’s accounts receivable, accounts payable, short-term debt and accrued liabilities approximates the carrying amounts because of the immediate or short-term maturity of these financial instruments.
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Cash, Cash Equivalents and Restricted Cash
The Company’s cash, cash equivalents and restricted cash are classified within Level 1 of the fair value hierarchy. The carrying amounts reported in the unaudited Condensed Consolidated Balance Sheets approximate the fair value of cash, cash equivalents and restricted cash due to the short-term nature of these assets.
Short-term Investments
The fair value of the Company’s short-term investments, which are classified as available-for-sale securities, is estimated based on quoted prices in active markets and is classified as a Level 1 measurement.
Convertible Notes
The fair value of the Company’s Convertible Notes is estimated based on quoted prices in active markets and is classified as a Level 1 measurement.
Offtake Advances
The Company’s Offtake Advances were classified within Level 3 of the fair value hierarchy as of December 31, 2021, because there were unobservable inputs that followed an imputed interest rate model to calculate the amortization of the embedded debt discount, which was recognized as non-cash interest expense, by estimating the timing of anticipated payments and reductions of the debt principal balance. This model-based valuation technique, for which there were unobservable inputs, was used to estimate the fair value of the liability classified within Level 3 of the fair value hierarchy as of December 31, 2021.
Equipment Notes
The Company’s equipment notes are classified within Level 2 of the fair value hierarchy because there are inputs that are directly observable for substantially the full term of the liability. Model-based valuation techniques for which all significant inputs are observable in active markets were used to calculate the fair values of liabilities classified within Level 2 of the fair value hierarchy.
Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The carrying amounts and estimated fair values by input level of the Company’s financial instruments were as follows:
September 30, 2022
(in thousands)
Carrying
Amount
Fair ValueLevel 1Level 2Level 3
Financial assets:
Cash and cash equivalents$427,969 $427,969 $427,969 $— $— 
Short-term investments$836,288 $836,288 $836,288 $— $— 
Restricted cash$6,445 $6,445 $6,445 $— $— 
Financial liabilities:
Convertible Notes$677,563 $628,763 $628,763 $— $— 
Equipment notes$7,763 $7,232 $— $7,232 $— 
December 31, 2021
(in thousands)
Carrying
Amount
Fair Value
Level 1Level 2Level 3
Financial assets:
Cash and cash equivalents$1,179,297 $1,179,297 $1,179,297 $— $— 
Restricted cash$1,860 $1,860 $1,860 $— $— 
Financial liabilities:
Convertible Notes$674,927 $880,026 $880,026 $— $— 
Offtake Advances$16,082 $16,501 $— $— $16,501 
Equipment notes$9,661 $9,737 $— $9,737 $— 
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NOTE 13—EARNINGS PER SHARE
Basic earnings per share (“EPS”) is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted EPS is computed by dividing net income by the weighted-average number of common shares outstanding plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method or the if-converted method, as applicable.
The following table reconciles the weighted-average common shares outstanding used in the calculation of basic EPS to the weighted-average common shares outstanding used in the calculation of diluted EPS:
For the three months ended September 30,For the nine months ended September 30,
2022202120222021
Weighted-average shares outstanding, basic176,543,624176,053,586176,476,276172,577,303
Assumed conversion of public warrants(1)
———3,787,498
Assumed conversion of Convertible Notes15,584,40915,584,40915,584,40910,789,206
Assumed conversion of restricted stock840,7861,283,194944,9251,214,349
Assumed conversion of restricted stock units441,038294,124433,329271,017
Weighted-average shares outstanding, diluted193,409,857193,215,313193,438,939188,639,373
(1)Warrants to purchase 11,499,968 shares of the Company’s common stock at $11.50 per share were issued in connection with Fortress Value Acquisition Corp.’s initial public offering pursuant to a warrant agreement, dated April 29, 2020, by and between the Company and Continental Stock Transfer & Trust Company, as warrant agent. The warrants were redeemed through a cashless exercise in the second quarter of 2021.
The following table presents the calculation of basic and diluted EPS for the Company’s common stock:
For the three months ended September 30,For the nine months ended September 30,
(in thousands, except share and per share data)2022202120222021
Calculation of basic EPS:
Net income$63,177 $42,763 $221,997 $86,048 
Weighted-average shares outstanding, basic 176,543,624 176,053,586 176,476,276 172,577,303 
Basic EPS$0.36 $0.24 $1.26 $0.50 
Calculation of diluted EPS:
Net income$63,177 $42,763 $221,997 $86,048 
Interest expense, net of tax(1):
Convertible Notes985 1,084 2,967 2,190 
Diluted income$64,162 $43,847 $224,964 $88,238 
Weighted-average shares outstanding, diluted193,409,857 193,215,313 193,438,939 188,639,373 
Diluted EPS$0.33 $0.23 $1.16 $0.47 
(1)The three and nine months ended September 30, 2022 and 2021, were tax-effected at a rate of 24.9%, 24.5%, 17.1% and 18.4%, respectively.
NOTE 14—RELATED-PARTY TRANSACTIONS
Product Sales and Cost of Sales: The Company and Shenghe enter into sales agreements in which Shenghe purchases the Company’s rare earth products at sale prices based on the ultimate market price of the product realized by Shenghe upon sales to their customers. Product sales from these agreements with Shenghe were $114.9 million and $401.5 million for the three and nine months ended September 30, 2022, respectively, as compared to $97.3 million and $229.2 million for the three and nine months ended September 30, 2021, respectively. Additionally, in March 2022, the Company entered into a sales agreement with Shenghe for certain stockpiles of rare earth fluoride (“REF”). Sales of REF, which are included in the unaudited Condensed Consolidated Statements of Operations in “Other sales (including related party),” were $8.5 million for the nine months ended September 30, 2022. Cost of sales, which includes shipping and freight, related to these agreements with Shenghe was $21.8 million and $65.4 million for the three and nine months ended September 30, 2022, respectively, as compared to $21.5 million and $57.2 million for the three and nine months ended September 30, 2021, respectively.
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Purchases of Materials and Supplies: The Company purchases certain reagent products (produced by an unrelated third-party manufacturer) used in the flotation process as well as other materials from Shenghe in the ordinary course of business. Total purchases were $15.3 million and $18.5 million for the three and nine months ended September 30, 2022, respectively, as compared to $1.2 million and $3.3 million for the three and nine months ended September 30, 2021, respectively.
Accounts Receivable: As of September 30, 2022, and December 31, 2021, $13.7 million and $49.9 million of the accounts receivable, respectively, and as stated on the unaudited Condensed Consolidated Balance Sheets, were receivable from and pertained to sales made to Shenghe in the ordinary course of business.
Indebtedness: The Company’s related-party debt is described in Note 7, “Debt Obligations.”
NOTE 15—SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information and non-cash investing and financing activities were as follows:
For the nine months ended September 30,
(in thousands)20222021
Supplemental cash flow information:
Cash paid for interest$1,140 $1,116 
Cash payments related to income taxes$16,827 $1 
Supplemental non-cash investing and financing activities:
Property, plant and equipment acquired with seller-financed equipment notes$— $9,407 
Property, plant and equipment purchased but not yet paid$35,779 $7,416 
Revenue recognized in exchange for debt principal reduction$13,566 $38,858 
Paycheck Protection Loan forgiveness(1)
$— $3,401 
Decrease in estimates of asset retirement costs$10,395 $— 
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ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of financial condition, results of operations, liquidity and capital resources should be read in conjunction with, and is qualified in its entirety by, the unaudited Condensed Consolidated Financial Statements and the notes thereto included in this Quarterly Report on Form 10-Q (“Form 10-Q”), and the Consolidated Financial Statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the Annual Report on Form 10-K (“Form 10-K”) for the year ended December 31, 2021. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. The actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth under “Part II. Item 1A. Risk Factors” and elsewhere in this Form 10-Q and “Part I. Item 1A. Risk Factors” and elsewhere in our Form 10-K. In addition, see “Cautionary Note Regarding Forward-Looking Statements.” References herein to the “Company,” “we,” “our,” and “us,” refer to MP Materials Corp. and its subsidiaries.
Business Overview
MP Materials Corp. is the largest producer of rare earth materials in the Western Hemisphere. The Company owns and operates the Mountain Pass Rare Earth Mine and Processing Facility (“Mountain Pass”), the only rare earth mining and processing site of scale in North America. We estimate the rare earth concentrate we produced and sold in 2021 represented approximately 15% of the rare earth content consumed in the global market.
Rare earth elements (“REE”) are fundamental building blocks of the modern economy, impacting trillions of dollars in global economic activity through the enablement of end products across industries including transportation, clean energy, robotics, national defense and consumer electronics, among others. Neodymium (“Nd”) and praseodymium (“Pr”) are rare earth elements which in combination form neodymium-praseodymium (“NdPr”), which represents a majority of the value contained in our rare earth concentrate. NdPr is most often utilized in NdPr magnets, which are also commonly referred to as “neo,” “NdFeB,” “NIB,” or permanent magnets and are made predominantly from an alloy of NdPr, iron and boron. NdPr magnets are the most widely used type of rare earth magnets and are critical for many advanced technologies that are experiencing strong secular growth, including electric vehicles (“EV”), drones, defense systems, wind turbines, robotics and many others. The rapid growth of these and other advanced motion technologies is expected to drive substantial demand growth for NdPr.
We produce our materials at Mountain Pass, one of the world’s richest rare earth deposits, co-located with integrated state-of-the-art processing and separation facilities. We acquired the Mountain Pass assets in 2017, restarted operations from cold-idle status and embarked on a deliberate, two-stage plan to optimize the facility and position the Company for growth and profitability. We commenced mining, comminution, beneficiation, and tailings management operations, which we designated Stage I of our multi-stage optimization plan, between December 2017 and February 2018.
We currently produce a rare earth concentrate that we sell pursuant to an offtake agreement (the “Offtake Agreement”), which became effective upon the termination of the A&R Offtake Agreement (as defined in Note 3, “Relationship and Agreements with Shenghe,” in the notes to the unaudited Condensed Consolidated Financial Statements), to Shenghe Resources (Singapore) International Trading Pte. Ltd. (“Shenghe”), an affiliate of Shenghe Resources Holding Co., Ltd., which, in turn, typically sells that product to refiners in China. These refiners separate the constituent REE contained in our concentrate and sell the separated products to their customers. Upon completion of our Stage II optimization project (“Stage II”), we anticipate producing separated rare earth oxides (“REO”), including NdPr oxide, and selling these products directly to end users, at which time we may no longer sell our concentrate.
In February 2022, we commenced construction of our initial rare earth metal, alloy and magnet manufacturing facility in Fort Worth, Texas (the “Fort Worth Facility”). Furthermore, in April 2022, we entered into a definitive long-term supply agreement with General Motors Company (NYSE: GM) (“GM”) to supply U.S.-sourced and manufactured rare earth materials, alloy and finished magnets for the electric motors in more than a dozen models using GM’s Ultium Platform, with a gradual production ramp that is expected to begin in late 2023, starting with alloy. The definitive long-term supply agreement finalized the terms of a binding agreement announced by the Company in December 2021. These developments are a part of our Stage III downstream expansion strategy (“Stage III”).
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Key Performance Indicators
We use the following key performance indicators to evaluate the performance of our business. Our calculations of these performance indicators may differ from similar measures published by other companies in our industry or in other industries. The following table presents our key performance indicators:
For the three months ended September 30,ChangeFor the nine months ended September 30,Change
(in whole units or dollars, except percentages)20222021$%20222021$%
REO production volume (MTs)10,886 11,998 (1,112)(9)%32,014 32,152 (138)— %
REO sales volume (MTs)10,676 12,814 (2,138)(17)%32,382 32,484 (102)— %
Realized price per REO MT$11,636 $7,693 $3,943 51 %$13,130 $7,043 $6,087 86 %
Production cost per REO MT$1,653 $1,449 $204 14 %$1,661 $1,484 $177 12 %
REO Production Volume
We measure our REO-equivalent production volume for a given period in metric tons (“MTs”), our principal unit of sale. This measure refers to the REO content contained in the rare earth concentrate we produce. Our REO production volume is a key indicator of our mining and processing capacity and efficiency.
The rare earth concentrate we currently produce is a processed, concentrated form of our mined rare earth-bearing ores. While our unit of production and sale is a MT of embedded REO, the actual weight of our rare earth concentrate is significantly greater, as the concentrate also contains non-REO minerals and residual moisture from the production process. We target REO content of greater than 60% per dry MT of concentrate (referred to as “REO grade”). The elemental distribution of REO in our concentrate is relatively consistent over time and production lot. We consider this the natural distribution, as it reflects the distribution of elements contained, on average, in our ore. As noted above, upon completion of Stage II, we expect to refine our rare earth concentrate to produce separated rare earths, including NdPr oxide.
REO Sales Volume
Our REO sales volume for a given period is calculated in MTs. A unit, or MT, is considered sold for purposes of this performance indicator once we recognize revenue on its sale. Our REO sales volume is a key measure of our ability to convert our production into revenue.
Realized Price per REO MT
We calculate the realized price per REO MT for a given period as the quotient of: (i) our Total Value Realized (see below) for a given period and (ii) our REO sales volume for the same period. We define Total Value Realized, which is a non-GAAP financial measure, as our product sales adjusted for the revenue impact of tariff rebates related to prior period sales.
Realized price per REO MT is an important measure of the market price of our product. Accordingly, we calculate realized price per REO MT to reflect a consistent basis between periods by eliminating the revenue impact of tariff-related rebates. See the “Non-GAAP Financial Measures” section below for a reconciliation of our Total Value Realized, which is a non-GAAP financial measure, to our product sales, which is determined in accordance with generally accepted accounting principles in the United States (“GAAP”), as well as the calculation of realized price per REO MT.
Production Cost per REO MT
We calculate the production cost per REO MT for a given period as the quotient of: (i) our Production Costs (see below) for a given period and (ii) our REO sales volume for the same period. We define Production Costs, which is a non-GAAP financial measure, as our cost of sales (excluding depletion, depreciation and amortization) less stock-based compensation expense included in cost of sales, shipping and freight costs, and costs attributable to certain other sales, for a given period.
Production cost per REO MT is a key indicator of our concentrate production efficiency. As a significant portion of our cash costs of Stage I production are fixed, our production cost per REO MT is influenced by mineral recovery, REO grade, plant feed rate and production uptime. See the “Non-GAAP Financial Measures” section below for a reconciliation of our Production Costs, which is a non-GAAP financial measure, to our cost of sales (excluding depletion, depreciation and amortization), which is determined in accordance with GAAP, as well as the calculation of production cost per REO MT.
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Key Factors Affecting Our Performance
We believe we are uniquely positioned to capitalize on the key trends of electrification and supply chain security, particularly as domestic EV production grows. Our success depends to a significant extent on our ability to take advantage of the following opportunities and meet the challenges associated with them.
Demand for REE
The key demand driver for REE is their use in a diverse array of growing end markets, including: clean-energy and transportation technologies (e.g., traction motors in EVs and generators in wind power turbines); high-technology applications (e.g., miniaturization of smart phones and other mobile devices, fiber optics, lasers, robotics, medical devices, etc.); critical defense applications (e.g., guidance and control systems, global positioning systems, radar and sonar, drones, etc.); and essential industrial infrastructure (e.g., advanced catalyst applications in oil refining and pollution-control systems in traditional internal-combustion automobiles, etc.). We believe these drivers will fuel the continued growth of the rare earth market, particularly the market for NdPr and permanent magnets.
We believe we benefit from several demand tailwinds for REE, and particularly for NdPr. These include the trend toward geographic supply chain diversification, particularly in relation to China, the U.S. government strategy to restore domestic supply of key minerals, and the increasing acceptance of environmental, social and governance mandates. However, changes in technology may also drive down the use of REE, including NdPr, in the components in which they are now used, or lead to a decline in reliance on such components altogether. We also operate in a competitive industry, and many of our key competitors are based in China, where competitors may not be subject to the same rigorous environmental standards and production costs are typically lower than in the United States.
Maximizing Production Efficiency
In 2021, REO production was approximately 3.5x greater than the highest ever production in a twelve-month period by the prior operator of Mountain Pass using principally the same capital equipment. We achieved these results through an optimized reagent scheme, lower process temperatures, better management of the tailings facility, and a commitment to operational excellence, driving approximately 95% uptime. We also believe that our Stage I optimization initiatives enabled us to achieve world-class production cost levels for rare earth concentrate.
The success of our business reflects our ability to manage our costs. Our production achievements in Stage I have provided economies of scale to lower production costs per unit of REO produced in concentrate. Stage II is designed to enable us to continue to manage our cost structure for separating REE through an optimized facility process flow. The reintroduction of the oxidizing roasting step will allow us to capitalize on the inherent advantages of the bastnaesite ore at Mountain Pass, which is uniquely suitable to low-cost refining by selectively eliminating the need to carry lower-value cerium through the separations process. The recommissioning of our natural gas-powered combined heat and power (“CHP”) plant, which was completed in December 2021, removed our reliance on the regional electric power grid. Further, our location offers significant transportation advantages that create meaningful cost efficiencies in securing incoming supplies and shipping of our final products.
We currently operate a single site in a single location, and any stoppage in activity, including for reasons outside of our control, could adversely impact our production, results of operations and cash flows. In addition, several of our current and potential competitors are government supported and may have access to substantially greater capital, which may allow them to make similar or greater efficiency improvements or undercut market prices for our product.
Development of Our REE Refining Capabilities and Other Opportunities
Stage II is focused on advancing our operations from the production of rare earth concentrate to the separation of individual REE. Construction is nearing completion and commissioning activities have commenced. The project incorporates upgrades and enhancements to the existing facility process flow to reliably produce separated REE at a lower cost and with an expected smaller environmental footprint per unit of REO produced than previously achieved. As part of Stage II, we are reintroducing an oxidizing roasting circuit, reorienting the plant process flow, increasing product finishing capacity, improving wastewater management, and making other improvements to materials handling and storage. Upon completion of Stage II, we expect to be a global low-cost, high-volume producer of NdPr oxide, which represents a majority of the value contained in our concentrate.
Further, we are pursuing vertical integration opportunities to process NdPr oxide into metal alloys and magnets, and incorporating magnet recycling capability. Our long-term plans to expand our presence as a global source for rare earth magnets began with our recent announcement to build the Fort Worth Facility. We believe integration into magnet production will provide some protection from commodity pricing volatility, while also enhancing our business profile as the producer of a
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critical industrial output in addition to a producer of resources. We expect our Stage III efforts to continue to benefit from geopolitical developments, including initiatives to repatriate critical materials supply chains.
In February 2022, we were awarded a $35.0 million contract by the Department of Defense’s Office of Industrial Base Analysis and Sustainment Program to design and build a facility to process heavy rare earth elements (“HREE”). Successful completion of this project will establish the first processing and separation facility of its kind for HREEs in support of commercial and defense applications in the United States. The HREE processing and separations facility will be built at Mountain Pass and tie into our other Stage II facilities.
Our Mineral Reserves
Our ore body has proven over more than 60 years of operations to be one of the world’s largest and highest-grade rare earth resources. As of September 30, 2021, SRK Consulting (U.S.), Inc., an independent consulting firm that we retained to assess our reserves, estimates total proven and probable reserves of 2.1 million short tons of REO contained in 30.4 million short tons of ore at Mountain Pass, with an average ore grade of 6.36%. These estimates use an estimated economical cut-off of 2.49% total rare earth oxide. Based on these estimated reserves and our expected annual production rate of REO upon completion of Stage II, as of September 30, 2021, our expected mine life was approximately 35 years. Over time, we expect to be able to continue to grow our expected mine life through additional exploratory drilling and improved processing capabilities.
Mining activities in the United States are heavily regulated, particularly in California. Regulatory changes may make it more challenging for us to access our reserves. In addition, new mineral deposits may be discovered elsewhere, which could make our operations less competitive.
COVID-19 Pandemic
The COVID-19 pandemic remains on-going and continues to impact the global economy. Varying degrees of preventative measures are still in place in China and other parts of the world, including city-wide lockdowns, travel restrictions, closures of non-essential businesses and other quarantine measures. In particular, preventative measures remain prevalent in China as a result of the Chinese government’s “Zero-COVID” policy. Since the first quarter of 2020, we have experienced, at times, significant shipping delays due to congestion and slowdowns at U.S. and international ports caused by shortages in vessels, containers, and truckers, also disrupting the global supply chain. Congestion and slowdowns have affected and may continue to affect the capacity at ports to receive deliveries of products or the loading of shipments onto vessels. Despite these factors, we have not experienced a reduction in production or sales due to the COVID-19 pandemic; however, the COVID-19 pandemic has contributed to certain cost and schedule pressures on the Stage II optimization project. The Company has worked proactively and diligently to adjust working schedules and hours to optimize logistics and shipping, which has thus far prevented a significant negative impact on our product sales and has mitigated certain impacts on Stage II construction and recommissioning progress.
As the situation continues to evolve, including as a result of new and potential future variants of COVID-19, the possibility of federal or state mandates on vaccinations, or other factors that may affect international shipping and logistics or involve responses to government actions such as strikes or other disruptions, it is impossible to predict the effect and ultimate impact of the COVID-19 pandemic on the Company’s business, results of operations, production and sales volumes, or growth projects. Accordingly, the extent and duration of any business disruptions, and related financial impact, cannot be estimated at this time.
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Results of Operations
Comparison of the Three and Nine Months Ended September 30, 2022 and 2021
The following table summarizes our results of operations:
For the three months ended September 30,ChangeFor the nine months ended September 30,Change
(in thousands, except percentages)20222021$%20222021$%
Revenue:
Product sales$124,231 $98,581 $25,650 26 %$425,169 $230,842 $194,327 84 %
Other sales214 1,173 (959)(82)%9,096 2,001 7,095 355 %
Total revenue124,445 99,754 24,691 25 %434,265 232,843 201,422 87 %
Operating costs and expenses:
Cost of sales(1)
22,417 21,907 510 2 %67,682 57,798 9,884 17 %
Selling, general and administrative17,604 14,881 2,723 18 %56,391 40,986 15,405 38 %
Advanced projects, development and other2,743 1,327 1,416 107 %6,229 2,436 3,793 156 %
Depreciation, depletion and amortization2,096 6,951 (4,855)(70)%12,763 19,767 (7,004)(35)%
Accretion of asset retirement and environmental obligations418 595 (177)(30)%1,255 1,780 (525)(29)%
Write-down of inventories— — — n.m.— 1,809 (1,809)(100)%
Total operating costs and expenses45,278 45,661 (383)(1)%144,320 124,576 19,744 16 %
Operating income79,167 54,093 25,074 46 %289,945 108,267 181,678 168 %
Interest expense, net(1,224)(2,624)1,400 (53)%(4,455)(6,417)1,962 (31)%
Other income, net6,168 97 6,071 6259 %8,574 3,656 4,918 135 %
Income before income taxes84,111 51,566 32,545 63 %294,064 105,506 188,558 179 %
Income tax expense(20,934)(8,803)(12,131)138 %(72,067)(19,458)(52,609)270 %
Net income$63,177 $42,763 $20,414 48 %$221,997 $86,048 $135,949 158 %
Adjusted EBITDA$91,372 $68,287 $23,085 34 %$333,581 $147,734 $185,847 126 %
Adjusted Net Income$68,119 $48,213 $19,906 41 %$241,771 $97,585 $144,186 148 %
n.m. - Not meaningful.
(1)Excludes depreciation, depletion and amortization.
Revenue consists primarily of product sales, which pertain to our sales of rare earth concentrate principally to Shenghe under the A&R Offtake Agreement for sales between January 2021 and February 2022, or the Offtake Agreement for sales beginning in March 2022. The sales price of rare earth concentrate sold to Shenghe under both agreements is based on an agreed-upon price per MT, subject to certain quality adjustments depending on the measured characteristics of the product, with an adjustment for the ultimate market price of the product realized by Shenghe upon sales to their customers, including the impact of changes in the exchange rate between the Chinese Yuan and the U.S. dollar.
The increase in product sales for the three months ended September 30, 2022, as compared to the prior year period, was driven by a higher realized price per REO MT, which increased by 51%, reflecting higher demand for rare earth products. The increase was partially offset by lower REO sales volume, which decreased by 17%, as compared to the prior year period. REO production volume for the three months ended September 30, 2022, decreased by 9% due primarily to lower ore feed grade and mineral recoveries, as compared to the prior year period, despite higher year-over-year ore feed rates.
The increase in product sales for the nine months ended September 30, 2022, as compared to the prior year period, was driven by a higher realized price per REO MT, which increased by 86%, reflecting higher demand for rare earth products. REO sales volume and REO production volume were relatively unchanged for the nine months ended September 30, 2022, as compared to the prior year period. For the nine months ended September 30, 2022, higher ore feed rates largely offset lower ore feed grade, as compared to the prior year period.
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REO sales volume varies period-to-period based on the timing of shipments, but generally tracks our REO production volumes over time given our take-or-pay offtake arrangement with Shenghe. See also the “Quarterly Performance Trend” section below.
The increase in other sales for the nine months ended September 30, 2022, as compared to the prior year period, was driven by $8.5 million of revenue related to a sales agreement with Shenghe entered into in March 2022 for certain stockpiles of rare earth fluoride (“REF”).
Cost of sales (excluding depreciation, depletion and amortization) consists of production- and processing-related labor costs (including wages and salaries, benefits, and bonuses), mining and processing supplies (such as reagents), parts and labor for the maintenance of our mining fleet and processing facilities, other facilities-related costs (such as property taxes and utilities), packaging materials, and shipping and freight costs.
Cost of sales for the three and nine months ended September 30, 2022, increased year over year primarily due to increases in production cost per REO MT from $1,449 for the three months ended September 30, 2021, to $1,653 for the three months ended September 30, 2022, and $1,484 for the nine months ended September 30, 2021, to $1,661 for the nine months ended September 30, 2022. The increases in production cost per REO MT were driven by higher materials, supplies and payroll costs, including an increase in employee headcount to support the expansion of operations, as well as higher energy costs incurred following the restart of our CHP plant in January 2022. These increases in costs offset production efficiencies achieved during the three and nine months ended September 30, 2022. Cost of sales for the three months ended September 30, 2022, were also impacted by lower year-over-year REO sales volume. Additionally, shipping and freight costs increased by $1.0 million and $3.5 million for the three and nine months ended September 30, 2022, respectively, as compared to the prior year periods.
Notwithstanding the increase in employee headcount discussed above and the impact of costs associated with recommissioning the CHP plant, we believe our production cost per REO MT has stabilized in the short-term, with operating efficiencies helping to offset the impact of inflationary pressure on materials, supplies, energy and labor. In addition, we continue to anticipate efficiency opportunities as we increase REO production volumes in our milling and flotation circuit over time. Production cost per REO MT varies period-to-period based on the timing of scheduled outages of our production facilities for maintenance as well as anticipated tie-ins of certain other Stage II-related facilities in the next year. See also the “Quarterly Performance Trend” section below.
Selling, general and administrative expenses consist primarily of accounting, finance and administrative personnel costs, including stock-based compensation expense related to these personnel; professional services (including legal, regulatory, audit and others); certain engineering expenses; insurance, license and permit costs; facilities rent and other costs; office supplies; general facilities expenses; certain environmental, health, and safety expenses; and gain or loss on sale or disposal of long-lived assets.
Selling, general and administrative expenses for the three and nine months ended September 30, 2022, reflect an increase in stock-based compensation expense of $3.0 million and $10.7 million, respectively, primarily from a grant of restricted stock units made to our chief executive officer during the fourth quarter of 2021. Excluding stock-based compensation expense, selling, general and administrative expenses for the three months ended September 30, 2022, decreased by $0.3 million, or 3%, primarily due to a legal settlement of $1.0 million, including legal fees, recorded in the prior year period, offset by an increase in personnel costs in the current year period. Excluding stock-based compensation expense, selling, general and administrative expenses for the nine months ended September 30, 2022, increased by $4.7 million, or 16%, primarily due to increases in personnel costs and other general and administrative costs.
Advanced projects, development and other consists principally of costs incurred in connection with research and development of new processes or to significantly enhance our existing processes, certain government contracts, and start-up costs, as well as costs incurred to support growth and development initiatives or other opportunities. Advanced projects, development and other for the three and nine months ended September 30, 2022, increased year over year primarily due to certain start-up costs that do not qualify for capitalization associated with our Stage II optimization project and our Stage III initiatives. In addition, the year-over-year increase for the nine months ended September 30, 2022, includes one-time start-up costs associated with restart of our CHP plant.
Depreciation, depletion and amortization primarily consists of depreciation of property, plant and equipment and depletion of mineral rights. The year-over-year decrease in depreciation, depletion and amortization for the three and nine months ended September 30, 2022, primarily reflects a reduction in depreciation of $2.7 million as a result of a decrement to our asset retirement obligation (“ARO”) (see Note 8, “Asset Retirement and Environmental Obligations,” in the notes to the unaudited Condensed Consolidated Financial Statements for more information), as well as decreases in depletion of $2.1
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million and $5.2 million, respectively, resulting from a revision to extend our estimate of the remaining useful life of the mineral rights at the beginning of the fourth quarter of 2021.
Accretion of asset retirement and environmental obligations is based on the estimated future cash flows required to reclaim our mine pit and related facilities at Mountain Pass and to monitor groundwater contamination, respectively. Accretion of asset retirement and environmental obligations for the three and nine months ended September 30, 2022, decreased year over year primarily as a result of a decrement to the Company’s ARO during the fourth quarter of 2021. The ARO decrement recorded in the third quarter of 2022 (noted above) will further reduce the accretion of our ARO in future periods.
Write-down of inventories for the nine months ended September 30, 2021, pertains to a non-cash write-down of a portion of our legacy low-grade stockpile inventory during the second quarter of 2021. See Note 5, “Inventories,” in the notes to the unaudited Condensed Consolidated Financial Statements for more information.
Interest expense, net consists of the amortization of the debt issuance costs on our Convertible Notes (as defined in the “Liquidity and Capital Resources” section below); the amortization of the discount on our debt obligation to Shenghe; and the expense associated with the 0.25% per annum interest rate on our Convertible Notes, offset by interest capitalized. Interest expense, net for the three and nine months ended September 30, 2022, decreased year over year due to the full repayment of the Offtake Advances in the first quarter of 2022, offset by the timing of the issuance of the Convertible Notes in March 2021.
Other income, net consists of interest and investment income and non-operating gains or losses. Other income, net for the three and nine months ended September 30, 2022, increased year over year as a result of interest and investment income earned on our short-term investments, which were purchased in the second quarter of 2022. The year-over-year increase in other income, net for the nine months ended September 30, 2022, was offset by a non-cash gain recognized during the second quarter of 2021 as a result of the Small Business Administration’s approval to forgive the Paycheck Protection Loan, which had a principal amount of $3.4 million.
Income tax expense consists of an estimate of U.S. federal and state income taxes in the jurisdictions in which we conduct business, adjusted for federal, state and local allowable income tax benefits, the effect of permanent differences and any valuation allowance against deferred tax assets. The effective tax rate (income taxes as a percentage of income or loss before income taxes) was 24.9% and 24.5% for the three and nine months ended September 30, 2022, respectively, as compared to 17.1% and 18.4% for the three and nine months ended September 30, 2021. The effective tax rates differed from the statutory tax rate of 21% primarily due to state income tax expense and a deduction limitation on officer’s compensation, partially offset by the California competes tax credit awarded to us in the fourth quarter of 2021 and a partial release of the valuation allowance against deferred tax assets in the third quarter of 2022.
On August 16, 2022, the U.S. government enacted the Inflation Reduction Act of 2022 which, among other things, implements a 15% minimum tax on book income of certain large corporations, a 1% excise tax on net stock repurchases, and provides several tax incentives to promote clean energy for tax years beginning after December 31, 2022. At this time, we do not expect the minimum tax or excise tax to have a material impact on our unaudited Condensed Consolidated Financial Statements. We are continuing to evaluate the impact of the clean energy incentives.
Quarterly Performance Trend
While our business is not highly seasonal in nature, we sometimes experience a timing lag between production and sales, which may result in volatility in our results of operations between periods. In addition, quarterly production is impacted by the timing of scheduled outages of our production facilities for maintenance, which typically occur in the second and fourth quarter.
The following table presents our key performance indicators for the quarterly periods indicated:
FY2022FY2021FY2020
(in whole units or dollars)Q3Q2Q1Q4Q3Q2Q1Q4Q3
REO production volume (MTs)10,886 10,300 10,828 10,261 11,998 10,305 9,849 9,337 10,197 
REO sales volume (MTs)10,676 10,000 11,706 9,674 12,814 9,877 9,793 10,320 9,429 
Realized price per REO MT
$11,636 $13,918 $13,818 $10,101 $7,693 $7,343 $5,891 $4,070 $3,393 
Production cost per REO MT$1,653 $1,750 $1,594 $1,525 $1,449 $1,538 $1,475 $1,589 $1,389 
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Liquidity and Capital Resources
Liquidity refers to our ability to generate sufficient cash flows to meet the cash requirements of our business operations, including working capital and capital expenditure needs, contractual obligations, debt service and other commitments. In recent years, our principal sources of liquidity have been financing through the consummation of the business combination with Fortress Value Acquisition Corp. in November 2020, the issuance of the Convertible Notes in March 2021, and net cash from operating activities. As of September 30, 2022, we had $1,264.3 million of cash, cash equivalents and short-term investments and $690.0 million principal amount of long-term debt.
Our results of operations and cash flows depend in large part upon the market prices of REO and particularly the price of rare earth concentrate. Rare earth concentrate is not quoted on any major commodities market or exchange and demand is currently constrained to a relatively limited number of refiners, a significant majority of which are based in China. Although we believe that our cash flows from operations and cash on hand are adequate to meet our liquidity requirements for the foreseeable future, uncertainty exists as to the market price of REO, especially in light of the ongoing COVID-19 pandemic, including the emergence of new and potential future variants.
Our current working capital needs relate mainly to our mining and beneficiation operations. Our principal capital expenditure requirements relate mainly to our Stage II optimization project and related HREE project and the development of the Fort Worth Facility, as well as the periodic replacement of mining or processing equipment. Our future capital requirements will depend on several factors, including future acquisitions and potential additional investments in further downstream production.
The completion of our mission to become a fully integrated domestic magnetics producer is expected to be capital intensive. In accelerating the strategic opportunity for the separation of HREE, enhancements were made to the initial scope of the Stage II project. Including these enhancements and other factors impacting the remaining cost of completion, and including certain early design and procurement costs associated with the HREE separation facility, and the development and construction costs of the Fort Worth Facility, as well as other growth and infrastructure investments at Mountain Pass, we expect to spend approximately $350 million on capital assets in 2022. We expect to spend additional amounts in 2023 and 2024 for final payments related to the Stage II optimization project and to complete the HREE separation facility and the Fort Worth Facility.
Our estimated costs or estimated time to complete these projects may increase, potentially significantly, due to factors outside of our control. While we believe that we have sufficient cash resources to fund these initiatives and operating working capital in the near term, we cannot assure this. If our available resources prove inadequate to fund our plans or commitments, we may be forced to revise our strategy and business plans or could be required, or elect, to seek additional funding through public or private equity or debt financings; however, such funding may not be available on terms acceptable to us, if at all. Any delays in our ongoing capital projects or substantial cost increases, including construction costs and related materials costs, related to their execution could significantly impact our ability to maximize our revenue opportunities and adversely impact our business and cash flows.
Debt and Other Long-Term Obligations
Convertible Notes: In March 2021, we issued $690.0 million aggregate principal amount of 0.25% unsecured green convertible senior notes that mature, unless earlier converted, redeemed or repurchased, on April 1, 2026 (the “Convertible Notes”), at a price of par. Interest on the Convertible Notes is payable on April 1st and October 1st of each year, beginning on October 1, 2021.
The Convertible Notes are convertible into shares of the Company’s common stock at an initial conversion price of $44.28 per share, or 22.5861 shares, per $1,000 principal amount of notes, subject to adjustment upon the occurrence of certain corporate events. However, in no event will the conversion price exceed 28.5714 shares of common stock per $1,000 principal amount of notes.
We aim to allocate an amount equal to the net proceeds from the Convertible Notes offering to existing or future investments in, or the financing or refinancing of, eligible “green projects.” Eligible green projects are intended to reduce the Company’s environmental impact and/or enable the production of low-carbon technologies. Pending such allocation of the net proceeds to eligible green projects, we intend to use the net proceeds from the Convertible Notes offering for general corporate purposes.
Offtake Advances: In March 2022, the Company made a $2.9 million payment to Shenghe pursuant to an obligation under the A&R Offtake Agreement to pay Shenghe, on an annual basis, an amount equal to our annual net income, less any amounts recouped through the Gross Profit Recoupment mechanism over the course of the year, until the Prepaid Balance was reduced
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to zero (terms as discussed and defined in Note 3, “Relationship and Agreements with Shenghe,” in the notes to the unaudited Condensed Consolidated Financial Statements).
Upon payment by the Company, the Prepaid Balance was repaid in full, and the A&R Offtake Agreement was terminated. Prior to full repayment, the debt to Shenghe was satisfied primarily through product sales, where partial non-cash consideration was received by the Company in the form of debt reduction (generally equal to approximately 15% of the ultimate market value of the REO, excluding tariffs, duties and certain other charges).
Equipment Notes: We have previously entered into several financing agreements for the purchase of equipment, including trucks, tractors, loaders, graders, and various other machinery, most recently in February 2021. As of September 30, 2022, we had $7.8 million in principal (and accrued interest) outstanding under the equipment notes.
Cash Flows
The following table summarizes our cash flows:
For the nine months ended September 30,Change
(in thousands, except percentages)20222021$%
Net cash provided by (used in):
Operating activities$314,419 $70,464 $243,955 346 %
Investing activities$(1,041,727)$(83,680)$(958,047)1145 %
Financing activities$(19,435)$669,610 $(689,045)n.m.
n.m. - Not meaningful.
Net Cash Provided by Operating Activities: Net cash provided by operating activities increased by $244.0 million for the nine months ended September 30, 2022, as compared to the prior year period, reflecting the increase in product sales and a net increase due to the timing of receipt or payment of working capital items, such as accounts receivable, partially offset by increases in our cost of sales; selling, general and administrative expenses; and payments for income taxes of $16.8 million. In addition, $13.6 million of our product sales was excluded from cash provided by operating activities for the nine months ended September 30, 2022, since that portion of the sales price was retained by Shenghe to reduce the debt obligation, compared to $38.9 million in the prior year period.
Net Cash Used in Investing Activities: Net cash used in investing activities increased by $958.0 million for the nine months ended September 30, 2022, compared to the prior year period, reflecting purchases of short-term investments of $1,358.4 million and an increase in additions to property, plant and equipment relating primarily to our Stage II optimization project and our Fort Worth Facility, partially offset by proceeds from sales and maturities of short-term investments of $525.9 million and a $2.5 million increase in proceeds from government awards used for construction, specifically our Stage II optimization project.
Net Cash Provided by (Used in) Financing Activities: Net cash used in financing activities was $19.4 million for the nine months ended September 30, 2022, compared to net cash provided by financing activities of $669.6 million in the prior year period. The current year period consisted primarily of tax withholding on stock-based awards and principal payments on debt obligations and finance leases while the prior year period consisted primarily of the net proceeds received from the issuance of the Convertible Notes in March 2021 of $672.3 million.
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Non-GAAP Financial Measures
We present Total Value Realized, Production Costs, Adjusted EBITDA, Adjusted Net Income, Adjusted Diluted EPS, and Free Cash Flow, which are non-GAAP financial measures that we use to supplement our results presented in accordance with GAAP. These measures may be similar to measures reported by other companies in our industry and are regularly used by securities analysts and investors to measure companies’ financial performance. Total Value Realized, Production Costs, Adjusted EBITDA, Adjusted Net Income, Adjusted Diluted EPS, and Free Cash Flow are not intended to be a substitute for any GAAP financial measure and, as calculated, may not be comparable to other similarly titled measures of performance or liquidity of other companies within our industry or in other industries.
Total Value Realized
Total Value Realized, which we use to calculate our key performance indicator, realized price per REO MT, is a non-GAAP financial measure. As mentioned above, realized price per REO MT is an important measure of the market price of our product. The following table presents a reconciliation of our Total Value Realized, to our product sales, which is determined in accordance with GAAP, as well as the calculation of realized price per REO MT:
For the three months ended September 30,For the nine months ended September 30,
(in thousands, unless otherwise stated)2022202120222021
Product sales$124,231 $98,581 $425,169 $230,842 
Adjusted for:
Tariff rebate(1)
— — — (2,050)
Total Value Realized124,231 98,581 425,169 228,792 
Divided by:
REO sales volume (in MTs)10,676 12,814 32,382 32,484 
Realized price per REO MT (in dollars)(2)
$11,636 $7,693 $13,130 $7,043 
(1)Represents non-cash revenue recognized in connection with a tariff rebate received relating to product sales from prior periods.
(2)May not recompute as presented due to rounding.
Production Costs
Production Costs, which we use to calculate our key performance indicator, production cost per REO MT, is a non-GAAP financial measure. As mentioned above, production cost per REO MT is a key indicator of our concentrate production efficiency. The following table presents a reconciliation of our Production Costs to our cost of sales (excluding depreciation, depletion and amortization), which is determined in accordance with GAAP, as well as the calculation of production cost per REO MT:
For the three months ended September 30,For the nine months ended September 30,
(in thousands, unless otherwise stated)2022202120222021
Cost of sales (excluding depreciation, depletion and amortization)
$22,417 $21,907 $67,682 $57,798 
Adjusted for:
Stock-based compensation expense(1)
(889)(542)(2,110)(2,438)
Shipping and freight(2)
(3,796)(2,795)(10,548)(7,076)
Other(3)
(89)— (1,225)(79)
Production Costs17,643 18,570 53,799 48,205 
Divided by:
REO sales volume (in MTs)10,676 12,814 32,382 32,484 
Production cost per REO MT (in dollars)(4)
$1,653 $1,449 $1,661 $1,484 
(1)Pertains only to the amount of stock-based compensation expense included in cost of sales.
(2)Includes $1.3 million for the nine months ended September 30, 2022, of shipping and freight costs associated with sales of REF stockpiles.
(3)Amount for the nine months ended September 30, 2022, pertains primarily to costs (excluding shipping and freight) attributable to sales of REF stockpiles.
(4)May not recompute as presented due to rounding.
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Adjusted EBITDA
We calculate Adjusted EBITDA as our GAAP net income before interest expense, net; income tax expense or benefit; and depreciation, depletion and amortization; further adjusted to eliminate the impact of stock-based compensation expense; transaction-related, start-up and other non-recurring costs; accretion of asset retirement and environmental obligations; gain or loss on sale or disposal of long-lived assets; write-downs of inventories; tariff rebates; and other income or loss. We present Adjusted EBITDA because it is used by management to evaluate our underlying operating and financial performance and trends. Adjusted EBITDA excludes certain expenses that are required in accordance with GAAP because they are non-recurring, non-cash or are not related to our underlying business performance. This non-GAAP financial measure is intended to supplement our GAAP results and should not be used as a substitute for financial measures presented in accordance with GAAP.
The following table presents a reconciliation of our Adjusted EBITDA, which is a non-GAAP financial measure, to our net income, which is determined in accordance with GAAP:
For the three months ended September 30,For the nine months ended September 30,
(in thousands)2022202120222021
Net income$63,177 $42,763 $221,997 $86,048 
Adjusted for:
Depreciation, depletion and amortization2,096 6,951 12,763 19,767 
Interest expense, net1,224 2,624 4,455 6,417 
Income tax expense20,934 8,803 72,067 19,458 
Stock-based compensation expense(1)
7,806 4,552 25,019 14,723 
Transaction-related, start-up and other non-recurring costs(2)
1,885 1,914 4,341 3,219 
Accretion of asset retirement and environmental obligations418 595 1,255 1,780 
Loss on sale or disposal of long-lived assets, net(3)
— 182 258 219 
Write-down of inventories(4)
— — — 1,809 
Tariff rebate(5)
— — — (2,050)
Other income, net(6)
(6,168)(97)(8,574)(3,656)
Adjusted EBITDA$91,372 $68,287 $333,581 $147,734 
(1)Principally included in “Selling, general and administrative” within our unaudited Condensed Consolidated Statements of Operations.
(2)Amounts for the three and nine months ended September 30, 2022, are principally comprised of start-up costs that do not qualify for capitalization, which relate to the restart of our CHP plant as well as certain costs associated with our Stage II optimization project and Stage III initiatives. Start-up costs are included in “Advanced projects, development and other” within our unaudited Condensed Consolidated Statements of Operations. Amounts for the three and nine months ended September 30, 2021, relate to advisory, consulting, accounting and legal expenses pertaining to non-recurring transactions, and are primarily included in “Selling, general and administrative” within our unaudited Condensed Consolidated Statements of Operations.
(3)Included in “Selling, general and administrative” within our unaudited Condensed Consolidated Statements of Operations.
(4)Represents a non-cash write-down of a portion of our legacy low-grade stockpile inventory during the second quarter of 2021.
(5)Represents non-cash revenue recognized in connection with a tariff rebate received relating to product sales from prior periods.
(6)Amounts for the three and nine months ended September 30, 2022, are principally comprised of interest and investment income. Amount for the nine months ended September 30, 2021, principally represents a non-cash gain recognized as a result of the Small Business Administration’s approval to forgive the Paycheck Protection Loan.
Adjusted Net Income and Adjusted Diluted EPS
We calculate Adjusted Net Income as our GAAP net income excluding the impact of stock-based compensation expense; transaction-related, start-up and other non-recurring costs; gain or loss on sale or disposal of long-lived assets; write-downs of inventories; tariff rebates; and other items that we do not consider representative of our underlying operations; adjusted to give effect to the income tax impact of such adjustments; and the release of valuation allowance. We calculate Adjusted Diluted EPS as our GAAP diluted earnings per share (“EPS”) excluding the per share impact, using GAAP diluted weighted-average shares outstanding as the denominator, of stock-based compensation expense; transaction-related, start-up and other non-recurring costs; gain or loss on sale or disposal of long-lived assets; write-downs of inventories; tariff rebates; and other items that we do not consider representative of our underlying operations; adjusted to give effect to the income tax impact of such adjustments; and the release of valuation allowance. Adjusted Net Income and Adjusted Diluted EPS exclude certain expenses that are required in accordance with GAAP because they are non-recurring, non-cash, or not related to our underlying business
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performance. These non-GAAP financial measures are intended to supplement our GAAP results and should not be used as a substitute for financial measures presented in accordance with GAAP.
Historically, the Company excluded the depletion on the mineral rights for the rare earth ores contained in our mine, which were recorded at fair value upon the acquisition of Secure Natural Resources LLC, from Adjusted Net Income and Adjusted Diluted EPS. Effective September 30, 2022, the Company no longer excludes depletion expense when calculating and presenting Adjusted Net Income and Adjusted Diluted EPS. For purposes of comparability, we have revised the prior year periods for this change.
To calculate the income tax impact of such adjustments on a year-to-date basis, we utilize an effective tax rate equal to our income tax expense excluding material discrete costs and benefits, with any impacts of changes in effective tax rate being recognized in the current period. We present Adjusted Net Income and Adjusted Diluted EPS because it is used by management to evaluate our underlying operating and financial performance and trends.
The following table presents a reconciliation of our Adjusted Net Income, which is a non-GAAP financial measure, to our net income, which is determined in accordance with GAAP:
For the three months ended September 30,For the nine months ended September 30,
(in thousands)2022202120222021
Net income$63,177 $42,763 $221,997 $86,048 
Adjusted for:
Stock-based compensation expense(1)
7,806 4,552 25,019 14,723 
Transaction-related, start-up and other non-recurring costs(2)
1,885 1,914 4,341 3,219 
Loss on sale or disposal of long-lived assets, net(3)
— 182 258 219 
Write-down of inventories(4)
— — — 1,809 
Tariff rebate(5)
— — — (2,050)
Other(6)
(23)(97)(247)(3,656)
Tax impact of adjustments above(7)
(2,299)(1,101)(7,170)(2,727)
Release of valuation allowance(8)
(2,427)— (2,427)— 
Adjusted Net Income$68,119 $48,213 $241,771 $97,585 
(1)Principally included in “Selling, general and administrative” within our unaudited Condensed Consolidated Statements of Operations.
(2)Amounts for the three and nine months ended September 30, 2022, are principally comprised of start-up costs that do not qualify for capitalization, which relate to the restart of our CHP plant as well as certain costs associated with our Stage II optimization project and Stage III initiatives. Start-up costs are included in “Advanced projects, development and other” within our unaudited Condensed Consolidated Statements of Operations. Amounts for the three and nine months ended September 30, 2021, relate to advisory, consulting, accounting and legal expenses pertaining to non-recurring transactions, and are primarily included in “Selling, general and administrative” within our unaudited Condensed Consolidated Statements of Operations.
(3)Included in “Selling, general and administrative” within our unaudited Condensed Consolidated Statements of Operations.
(4)Represents a non-cash write-down of a portion of our legacy low-grade stockpile inventory during the second quarter of 2021.
(5)Represents non-cash revenue recognized in connection with a tariff rebate received relating to product sales from prior periods.
(6)Amount for the nine months ended September 30, 2021, principally represents a non-cash gain recognized as a result of the Small Business Administration’s approval to forgive the Paycheck Protection Loan, which is included in “Other income, net” within our unaudited Condensed Consolidated Statements of Operations.
(7)Tax impact of adjustments is calculated using an adjusted effective tax rate, which excludes the impact of discrete tax costs and benefits, to each adjustment. The adjusted effective tax rates were 23.8%, 24.4%, 16.8% and 19.1%, for the three and nine months ended September 30, 2022 and 2021, respectively.
(8)Reflects the impact of a release of a portion of our valuation allowance.
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The following table presents a reconciliation of our Adjusted Diluted EPS, which is a non-GAAP financial measure, to our diluted EPS, which is determined in accordance with GAAP:
For the three months ended September 30,For the nine months ended September 30,
2022202120222021
Diluted EPS$0.33 $0.23 $1.16 $0.47 
Adjusted for:
Stock-based compensation expense0.04 0.02 0.13 0.08 
Transaction-related, start-up and other non-recurring costs(1)
0.01 0.01 0.02 0.02 
Loss on sale or disposal of long-lived assets, net
0.00 0.00 0.00 0.00 
Write-down of inventories(2)
0.00 0.00 0.00 0.01 
Tariff rebate(3)
0.00 0.00 0.00 (0.01)
Other(4)
0.00 0.00 0.00 (0.02)
Tax impact of adjustments above(5)
(0.01)0.00 (0.03)(0.02)
Release of valuation allowance(6)
(0.01)0.00 (0.01)0.00 
Adjusted Diluted EPS$0.36 $0.26 $1.27 $0.53 
Diluted weighted-average shares outstanding193,409,857 193,215,313 193,438,939 188,639,373 
(1)Amounts for the three and nine months ended September 30, 2022, are principally comprised of start-up costs that do not qualify for capitalization, which relate to the restart of our CHP plant as well as certain costs associated with our Stage II optimization project and Stage III initiatives. Amounts for the three and nine months ended September 30, 2021, relate to advisory, consulting, accounting and legal expenses pertaining to non-recurring transactions.
(2)Represents a non-cash write-down of a portion of our legacy low-grade stockpile inventory during the second quarter of 2021.
(3)Represents non-cash revenue recognized in connection with a tariff rebate received relating to product sales from prior periods.
(4)Amount for the nine months ended September 30, 2021, principally represents a non-cash gain recognized as a result of the Small Business Administration’s approval to forgive the Paycheck Protection Loan.
(5)Tax impact of adjustments is calculated using an adjusted effective tax rate, which excludes the impact of discrete tax costs and benefits, to each adjustment. The adjusted effective tax rates were 23.8%, 24.4%, 16.8% and 19.1%, for the three and nine months ended September 30, 2022 and 2021, respectively.
(6)Reflects the impact of a release of a portion of our valuation allowance.
Free Cash Flow
We calculate Free Cash Flow as net cash provided by operating activities less additions to property, plant and equipment, net of proceeds from government awards used for construction. We believe Free Cash Flow is useful for comparing our ability to generate cash with that of our peers. The presentation of Free Cash Flow is not meant to be considered in isolation or as an alternative to cash flows from operating activities and does not necessarily indicate whether cash flows will be sufficient to fund cash needs.
The following table presents a reconciliation of our Free Cash Flow, which is a non-GAAP financial measure, to our net cash provided by operating activities, which is determined in accordance with GAAP:
For the nine months ended September 30,
(in thousands)20222021
Net cash provided by operating activities(1)
$314,419 $70,464 
Additions to property, plant and equipment, net(2)
(209,202)(83,805)
Free Cash Flow$105,217 $(13,341)
(1)Under the terms of the A&R Offtake Agreement and pursuant to the accounting treatment thereof, $13.6 million and $38.9 million of our product sales for the nine months ended September 30, 2022 and 2021, respectively, were excluded from cash provided by operating activities since that portion of the sales price was retained by Shenghe to reduce the debt obligation.
(2)Amounts for the nine months ended September 30, 2022 and 2021, are net of $5.1 million and $2.6 million, respectively, in proceeds from government awards used for construction, specifically our Stage II optimization project.
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Critical Accounting Policies
A complete discussion of our critical accounting policies is included in our Form 10-K for the year ended December 31, 2021. There have been no significant changes in our critical accounting policies during the three months ended September 30, 2022.
Recently Adopted and Issued Accounting Pronouncements
Recently adopted and issued accounting pronouncements are described in Note 2, “Significant Accounting Policies,” in the notes to the unaudited Condensed Consolidated Financial Statements.
ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate risk
We had cash, cash equivalents and short-term investments totaling $1,264.3 million as of September 30, 2022, of which $1,245.6 million was invested in money market funds, U.S. Treasury and agency securities. Our cash, cash equivalents and short-term investments are held for working capital and general corporate purposes. We do not enter into investments for trading or speculative purposes.
Our cash equivalents and short-term investments are subject to market risk due to changes in interest rates. Fixed rate securities may have their market value adversely affected due to a rise in interest rates. Due in part to these factors, our future investment income may fall short of our expectations due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates. As our short-term investments are classified as available-for-sale, no gains are recognized due to changes in interest rates. As losses due to changes in interest rates are generally not considered to be credit related, no losses in such investments are recognized due to changes in interest rates unless we intend to sell, it is more likely than not that we will be required to sell, we sell prior to maturity, or we otherwise determine that all or a portion of the decline in fair value is due to credit related factors.
As of September 30, 2022, a hypothetical increase of 100-basis points in interest rates would not have a material impact on the value of our cash equivalents or short-term investments in our unaudited Condensed Consolidated Financial Statements.
With the exception of the item above, there have been no material changes in our market risk exposures for the three months ended September 30, 2022, as compared to those discussed in our Form 10-K for the year ended December 31, 2021.
ITEM 4.    CONTROLS AND PROCEDURES
The Company’s management, under the supervision and with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of September 30, 2022. Based on this evaluation, our principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2022, to ensure that information required to be disclosed by the Company in reports we file or submit under the Exchange Act is (i) recorded, processed, summarized, evaluated and reported, as applicable, within the time periods specified in the United States Securities and Exchange Commission’s rules and forms and (ii) accumulated and communicated to the Company’s management, including the Company’s principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures.
There were no changes that occurred during the fiscal quarter covered by this Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
ITEM 1.    LEGAL PROCEEDINGS
From time to time, we may be subject to legal and governmental proceedings and claims in the ordinary course of business. We are not currently a party to any material legal or governmental proceedings, and, to our knowledge, none is threatened.
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ITEM 1A.    RISK FACTORS
The Company’s business, reputation, results of operations and financial condition, as well as the price of the Company’s common stock, can be affected by a number of factors, whether currently known or unknown, including those described in Part I, Item 1A. “Risk Factors” in our Form 10-K for the year ended December 31, 2021. When any one or more of these risks materialize from time to time, the Company’s business, reputation, results of operations and financial condition, as well as the price of the Company’s common stock, can be materially and adversely affected. There have been no material changes to the risk factors disclosed in our Form 10-K for the year ended December 31, 2021.
ITEM 4.    MINE SAFETY DISCLOSURES
The information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95.1 to this Form 10-Q for the quarterly period ended September 30, 2022.
ITEM 6.    EXHIBITS
Exhibit No.Description
31.1*
31.2*
32.1**
32.2**
95.1*
101.INSInline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCHInline XBRL Taxonomy Extension Schema Document.
101.CALInline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEFInline XBRL Taxonomy Extension Definition Linkbase Document.
101.LABInline XBRL Taxonomy Extension Label Linkbase Document.
101.PREInline XBRL Taxonomy Extension Presentation Linkbase Document.
104Cover Page Inline XBRL File (included in Exhibit 101).
*Filed herewith.
**Furnished herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
MP MATERIALS CORP.
Dated:November 4, 2022By:/s/ Ryan Corbett
Ryan Corbett
Chief Financial Officer
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