filings.toolsItem 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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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 for the year ended December 31, 2022 (“Form 10-K”). 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. See also “Cautionary Note Regarding Forward-Looking Statements.”
Business Overview
MP Materials Corp., including its subsidiaries (“we,” “our,” and “us”), 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, and are also constructing a rare earth metal, alloy and magnet manufacturing facility in Fort Worth, Texas (the “Fort Worth Facility”), where we anticipate manufacturing, among other products, neodymium-iron-boron (“NdFeB”) permanent magnets.
Currently, we primarily produce a rare earth concentrate that is principally sold pursuant to the Offtake Agreement to Shenghe (as such terms are defined in Note 15, “Related-Party Transactions,” in the notes to the unaudited Condensed Consolidated Financial Statements), that, in turn, typically sells that product to refiners in China. These refiners separate the constituent rare earth elements (“REE”) contained in our concentrate and sell the separated products to their customers. Upon completing initial commissioning of the remaining circuits of our Stage II optimization project (“Stage II”) in the third quarter of 2023, we began producing separated rare earth products, including neodymium-praseodymium (“NdPr”) oxide. We anticipate selling these new products to customers in the U.S. and around the globe beginning in the fourth quarter of 2023, including to Japanese customers pursuant to a distributorship agreement with Sumitomo Corporation of Americas (“Sumitomo”).
Additionally, in April 2022, we entered into a 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. These developments are a part of our Stage III downstream expansion strategy (“Stage III”).
Certain REE serve as critical inputs for the rare earth magnets inside the electric motors and generators powering carbon-reducing technologies such as electric vehicles (“EVs”) and wind turbines, as well as drones, defense systems, robotics and many other high-growth, advanced technologies. Our integrated operations at Mountain Pass combine low production costs with high environmental standards, thereby restoring American leadership to a critical industry with a strong commitment to sustainability.
Recent Developments and Other Information
Distribution Agreement with Sumitomo
In February 2023, we entered into a distributorship agreement (“Distribution Agreement”) with Sumitomo, under which Sumitomo would serve as the exclusive distributor of NdPr oxide, produced by us, to Japanese customers. Further, in connection with the Distribution Agreement, we intend to collaborate with Sumitomo on the supply of rare earth metals and other products. Under the terms of the Distribution Agreement, Sumitomo will be paid a variable commission. The initial term of the Distribution Agreement is through the end of 2025 with options to renew annually.
Patent and Intellectual Property License
In August 2023, we acquired a license to use patented technology, technical know-how, and other intellectual property pertaining to the development and manufacturing of magnetics products in exchange for 435,729 shares of our common stock. Contemporaneous with the acquisition of the license, we entered into a consulting agreement in support of integrating the licensed technology and know-how into its existing processes aimed at the development of magnetics products.
Tolling Agreement with VREX Holdco
In October 2023, we entered into a tolling agreement with VREX Holdco Pte. Ltd. (“VREX Holdco”) (the “Tolling Agreement”), a wholly-owned subsidiary of Shenghe. VREX Holdco owns Vietnam Rare Earth Company Limited (“VREX”), which owns and operates a metal processing plant and related facilities in Vietnam. This Tolling Agreement replaced the previous tolling agreement signed in March 2023 directly with VREX. Pursuant to the Tolling Agreement, we will deliver NdPr oxide to VREX Holdco, which VREX Holdco will then provide to VREX to process into NdPr metal for delivery to our customers globally. As several of our potential customers that manufacture magnets outside of China prefer to purchase NdPr metal in addition to NdPr oxide, this Tolling Agreement will enable us to distribute NdPr products more widely to customers in Japan and other global markets. During the term of the Tolling Agreement, we will pay VREX Holdco a processing fee per unit of rare earth metal produced. We will maintain title to the products and directly enter into sales agreements for the produced NdPr metal. The initial term of the Tolling Agreement is three years and may be renewed for additional three-year terms.
COVID-19 Pandemic
At the onset of the COVID-19 pandemic and through 2022, we 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. Despite these factors, we did not experience a reduction in production or sales due to the COVID-19 pandemic. However, the COVID-19 pandemic contributed to certain cost and schedule pressures for capital projects. We continue to monitor the global situation, including the impacts of new and potential future variants of COVID-19, or other factors that may affect international shipping, logistics, and supply chain, or involve responses to government actions such as strikes or other disruptions.
Key Performance Indicators
We have historically used and/or currently use the following key performance indicators (“KPIs”) to evaluate the performance of our business. However, as our business continues to evolve and transitions from a producer of rare earth concentrate to a producer of separated rare earth products, the metrics that management uses to evaluate the business may continue to change or be revised. For example, in completing the transition to separated rare earth products, we may determine that production cost per rare earth oxide (“REO”) equivalent metric ton (“MT”), which is a metric focused solely on Stage I concentrate operations, is no longer meaningful in evaluating and understanding our business or operating results. In addition, during the third quarter of 2023, upon the production of separated products, we identified two new KPIs of our business: NdPr Production Volume and NdPr Sales Volume. Our calculations of these KPIs may differ from similar measures published by other companies in our industry or in other industries. The following table presents our KPIs:
| For the three months ended September 30, | Change | For the nine months ended September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| (in whole units or dollars, except percentages) | 2023 | 2022 | Amount | % | 2023 | 2022 | Amount | % | |||||||||||||||||||||||||||||||||||||||
| Rare earth concentrate | |||||||||||||||||||||||||||||||||||||||||||||||
| REO Production Volume (MTs) | 10,766 | 10,886 | (120) | (1) | % | 32,300 | 32,014 | 286 | 1 | % | |||||||||||||||||||||||||||||||||||||
| REO Sales Volume (MTs) | 9,177 | 10,676 | (1,499) | (14) | % | 29,663 | 32,382 | (2,719) | (8) | % | |||||||||||||||||||||||||||||||||||||
| Realized Price per REO MT | $ | 5,718 | $ | 11,636 | $ | (5,918) | (51) | % | $ | 7,152 | $ | 13,130 | $ | (5,978) | (46) | % | |||||||||||||||||||||||||||||||
| Production Cost per REO MT | $ | 2,020 | $ | 1,653 | $ | 367 | 22 | % | $ | 1,977 | $ | 1,661 | $ | 316 | 19 | % | |||||||||||||||||||||||||||||||
| Separated NdPr products | |||||||||||||||||||||||||||||||||||||||||||||||
| NdPr Production Volume (MTs) | 50 | N/A | N/A | N/A | 50 | N/A | N/A | N/A | |||||||||||||||||||||||||||||||||||||||
| NdPr Sales Volume (MTs) | — | N/A | N/A | N/A | — | N/A | N/A | N/A | |||||||||||||||||||||||||||||||||||||||
| N/A = Not applicable as there was neither NdPr production nor sales volume in these periods. |
REO Production Volume
We measure our REO-equivalent production volume for a given period in MTs, our principal unit of sale for our concentrate product. This measure refers to the REO content contained in the rare earth concentrate we produce and, beginning in the second quarter of 2023, includes volumes fed into downstream circuits for commissioning and starting up our separations facilities and for producing separated NdPr product, the latter of which is also included in our KPI, NdPr Production Volume. Our REO Production Volume is a key indicator of our mining and concentrate processing capacity and efficiency.
The rare earth concentrate 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, loss-on-ignition, 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.
REO Sales Volume
Our REO Sales Volume for a given period is calculated in MTs. A unit, or MT, is considered sold once we recognize revenue on its sale as determined in accordance with generally accepted accounting principles in the United States (“GAAP”). Our REO Sales Volume is a key measure of our ability to convert our concentrate production into revenue. Our REO Sales Volume for the three and nine months ended September 30, 2023, included both traditional concentrate as well as roasted concentrate.
Realized Price per REO MT
We calculate the Realized Price per REO MT for a given period as the quotient of: (i) our rare earth concentrate sales, which are determined in accordance with GAAP, for a given period and (ii) our REO Sales Volume for the same period. Realized Price per REO MT is an important measure of the market price of our concentrate product. Historically, we used Total Value Realized, which was a non-GAAP financial measure defined as our rare earth concentrate sales (previously captioned as product sales) adjusted for the revenue impact of tariff rebates related to prior period sales, as the numerator in the calculation of Realized Price per REO MT. As we no longer expect to receive any additional tariff rebates, we no longer utilize Total Value Realized in 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 not attributable to concentrate sales.
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.
NdPr Production Volume
We measure our NdPr Production Volume for a given period in MTs, our principal unit of sale for our NdPr separated products. NdPr Production Volume refers to the volume of finished and packaged NdPr oxide produced at Mountain Pass for a given period. NdPr Production Volume is a key indicator of our separating and finishing capacity and efficiency.
NdPr Sales Volume
Our NdPr Sales Volume for a given period is calculated in MTs and on an NdPr oxide-equivalent basis (see example below). A unit, or MT, is considered sold once we recognize revenue on its sale, whether sold as NdPr oxide or NdPr metal, as determined in accordance with GAAP. For NdPr metal sales, the MTs sold and included in NdPr Sales Volume are calculated on the basis of the volume of NdPr oxide used to produce such NdPr metal. For example, assuming a material conversion ratio of 1.25, a sale of 100 MTs of NdPr metal would be included in this KPI as 125 MTs of NdPr oxide-equivalent. NdPr Sales Volume is a key measure of our ability to convert our production of separated NdPr products into revenue.
We expect to have a mix of contracts with customers where we will sell NdPr as (i) oxide, (ii) metal, where the amount of oxide required to produce such metal is variable, and (iii) metal, where we have a guarantee of the amount produced and sold based on the amount of oxide consumed. Among other factors, differences between quarterly NdPr Production Volume and NdPr Sales Volume may be caused by the time required for the conversion of NdPr oxide to NdPr metal, including time in-transit.
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 continued 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 drivers for REE are a diverse array of growing end markets, including clean-energy and transportation technologies, consumer and medical applications, critical defense systems, and essential industrial infrastructure. Despite the current macroeconomic conditions, we continue to believe we benefit from the growth of the rare earth market, particularly the market for NdPr and permanent magnets, and from several demand tailwinds for REE. These include the trend toward electrification; geographic supply chain diversification, particularly in relation to China; the U.S. government initiatives to restore domestic supply of key minerals; and the increasing acceptance of environmental, social and governance mandates.
However, changes in technology could 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. Such actual, or perceived, decreases in demand for REE, could result in a decline in the market price of REE, including NdPr, and/or result in pricing volatility. 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 U.S.
Maximizing Production Efficiency
Since the implementation of our Stage I optimization plan and the achievement of commercial production on July 1, 2019, our quarterly REO Production Volume has exceeded 8,500 MTs, and we have achieved at least 10,000 MTs of REO Production Volume every quarter since the second quarter of 2021. These results were achieved by optimizing the reagent scheme, reducing process temperatures, improving tailings facility management, and committing to operational excellence, which has allowed us to sustain approximately 95% uptime. Our Stage I optimization plan enabled us to achieve what we believe to be world-class production cost levels for rare earth concentrate.
The success of our business reflects our ability to continue to manage our costs. Our production achievements in Stage I have provided economies of scale to lower production costs per MT of REO produced in concentrate. Furthermore, we designed our Stage II process flow to capitalize on the inherent advantages of the bastnaesite ore at Mountain Pass, that is well-suited to low-cost refining by selectively eliminating the need to carry cerium, a lower-value mineral, through the separations process. Additionally, our location offers 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 more capital, which may allow them to make similar or greater efficiency improvements or undercut market prices for our product.
Development of Our REE Refining, Metal Alloy, and Magnet-Making Capabilities
Stage II advances our operations from the production of rare earth concentrate to the separation of individual REE. The project incorporated upgrades and enhancements to the prior facility process flow to reliably produce separated REE at a low cost and with the intent of minimizing our impact on the environment. More specifically, we have reintroduced an oxidizing roasting circuit, reoriented portions of the plant process flow, increased product finishing capacity, improved wastewater management, and made other improvements to materials handling and storage. During the third quarter of 2023, we began producing separated rare earth products. We expect that it may take up to several quarters to achieve our designed throughput of separated products. As we increase production of separated products over time, we expect to improve our per-unit costs of NdPr oxide, which represents a majority of the value contained in our concentrate.
Partially supported by a $35.0 million award from the Department of Defense’s Office of Industrial Base Policy, Industrial Base Analysis and Sustainment program, we are currently advancing the facilitating works, engineering and procurement on a processing and separations facility for heavy rare earth elements (“HREE”) (the “HREE Facility”), which will be built at Mountain Pass and will be integrated into the rest of our Stage I and Stage II facilities. The HREE Facility is expected to support the separating of HREE contained in the Mountain Pass ore as well as from third-party feedstocks.
In addition, we are constructing the Fort Worth Facility, and developing engineering and manufacturing technology to process NdPr oxide into metal alloys and magnets, while incorporating magnet recycling capabilities. These initiatives support our long-term plans to become a leading global source for rare earth magnets. 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 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.
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 December 31, 2022, SRK Consulting (U.S.), Inc., an independent consulting firm that we retained to assess our reserves, estimated total proven and probable reserves of 1.96 million short tons of REO contained in 29.30 million short tons of ore at Mountain Pass, with an average ore grade of 6.32%. 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, our expected mine life was approximately 34 years as of December 31, 2022. Over time, we expect to be able to continue to grow our expected mine life through additional exploratory drilling and improved processing capabilities, which may result in changes to various assumptions underlying our mineral reserve estimate.
Mining activities in the U.S. 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.
Results of Operations
Comparison of the Three and Nine Months Ended September 30, 2023 and 2022
The following table summarizes our results of operations:
| For the three months ended September 30, | Change | For the nine months ended September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| (in thousands, except percentages) | 2023 | 2022 | $ | % | 2023 | 2022 | $ | % | |||||||||||||||||||||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||||||||||||||||||||||||||
| Rare earth concentrate | $ | 52,472 | $ | 124,231 | $ | (71,759) | (58) | % | $ | 212,139 | $ | 425,169 | $ | (213,030) | (50) | % | |||||||||||||||||||||||||||||||
| Other rare earth products | 44 | 214 | (170) | (79) | % | 101 | 9,096 | (8,995) | (99) | % | |||||||||||||||||||||||||||||||||||||
| Total revenue | 52,516 | 124,445 | (71,929) | (58) | % | 212,240 | 434,265 | (222,025) | (51) | % | |||||||||||||||||||||||||||||||||||||
| Operating costs and expenses: | |||||||||||||||||||||||||||||||||||||||||||||||
| Cost of sales(1) | 22,217 | 22,417 | (200) | (1) | % | 69,137 | 67,682 | 1,455 | 2 | % | |||||||||||||||||||||||||||||||||||||
| Selling, general and administrative | 19,561 | 17,722 | 1,839 | 10 | % | 57,829 | 56,150 | 1,679 | 3 | % | |||||||||||||||||||||||||||||||||||||
| Advanced projects, start-up, development and other | 10,209 | 2,625 | 7,584 | 289 | % | 25,711 | 6,212 | 19,499 | 314 | % | |||||||||||||||||||||||||||||||||||||
| Depreciation, depletion and amortization | 16,751 | 2,096 | 14,655 | 699 | % | 37,076 | 12,763 | 24,313 | 190 | % | |||||||||||||||||||||||||||||||||||||
| Accretion of asset retirement and environmental obligations | 227 | 418 | (191) | (46) | % | 681 | 1,255 | (574) | (46) | % | |||||||||||||||||||||||||||||||||||||
| Loss on disposals of long-lived assets, net | 1,087 | — | 1,087 | N/M | 5,897 | 258 | 5,639 | N/M | |||||||||||||||||||||||||||||||||||||||
| Total operating costs and expenses | 70,052 | 45,278 | 24,774 | 55 | % | 196,331 | 144,320 | 52,011 | 36 | % | |||||||||||||||||||||||||||||||||||||
| Operating income (loss) | (17,536) | 79,167 | (96,703) | N/M | 15,909 | 289,945 | (274,036) | (95) | % | ||||||||||||||||||||||||||||||||||||||
| Interest expense, net | (1,396) | (1,224) | (172) | (14) | % | (4,147) | (4,455) | 308 | 7 | % | |||||||||||||||||||||||||||||||||||||
| Other income, net | 14,456 | 6,168 | 8,288 | 134 | % | 41,970 | 8,574 | 33,396 | 390 | % | |||||||||||||||||||||||||||||||||||||
| Income (loss) before income taxes | (4,476) | 84,111 | (88,587) | (105) | % | 53,732 | 294,064 | (240,332) | (82) | % | |||||||||||||||||||||||||||||||||||||
| Income tax benefit (expense) | 200 | (20,934) | 21,134 | N/M | (13,166) | (72,067) | 58,901 | 82 | % | ||||||||||||||||||||||||||||||||||||||
| Net income (loss) | $ | (4,276) | $ | 63,177 | $ | (67,453) | N/M | $ | 40,566 | $ | 221,997 | $ | (181,431) | (82) | % | ||||||||||||||||||||||||||||||||
| Adjusted EBITDA**(2)** | $ | 15,551 | $ | 91,372 | $ | (75,821) | (83) | % | $ | 101,202 | $ | 333,581 | $ | (232,379) | (70) | % | |||||||||||||||||||||||||||||||
| Adjusted Net Income**(2)** | $ | 7,026 | $ | 68,119 | $ | (61,093) | (90) | % | $ | 75,376 | $ | 241,771 | $ | (166,395) | (69) | % | |||||||||||||||||||||||||||||||
N/M = Not meaningful.
(1)Excludes depreciation, depletion and amortization.
(2)Non-GAAP financial measures are defined and reconciled to the most directly comparable GAAP financial measures in the “Non-GAAP Financial Measures” section below.
Revenue consists primarily of sales of rare earth concentrate, including roasted concentrate, principally to Shenghe under the amended and restated offtake agreement (“A&R Offtake Agreement”) for sales between January 2022 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 decreases in rare earth concentrate sales for the three and nine months ended September 30, 2023, as compared to the respective prior year periods, were driven by lower Realized Price per REO MT, which decreased by 51% and 46%, respectively, when compared to the respective prior year periods, as well as lower REO Sales Volume, which decreased by 14% and 8%, respectively, when compared to the respective prior year periods.
Realized Price per REO MT for the three and nine months ended September 30, 2023, reflects a significantly softer pricing environment for rare earth products, as compared to the prior year periods when pricing peaked in the first and second quarter of 2022. As noted above in the “Factors Affecting our Performance” section, market prices for rare earth products may be volatile due to actual or perceived changes in supply or demand. The decreases in REO Sales Volume for the three and nine months ended September 30, 2023, were due to the start-up of Stage II operations. A significant portion of the REO produced, which could otherwise have been sold as rare earth concentrate, was used to charge the Stage II circuits, establish separations work-in-process inventory, or produce packaged and finished separated rare earth products.
Historically, given our take-or-pay offtake arrangement with Shenghe, our REO Sales Volume has generally tracked our REO Production Volume over time despite period-to-period differences caused by the timing of shipments. However, as we ramp up production of separated rare earth materials, we expect that significant volumes of REO produced from Stage I operations will be retained for separation and not sold as concentrate. In addition, a significant portion of the contained cerium in the REO produced will be intentionally rejected and may not result in finished product. Accordingly, as evidenced in the third quarter of 2023, we expect that REO Sales Volume will be significantly lower than REO Production Volume. See also the “Quarterly Performance Trend” section below.
The decrease in other rare earth product sales for the nine months ended September 30, 2023, 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.
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 months ended September 30, 2023, remained relatively flat year over year, primarily due to an increase in Production Cost per REO MT of $367 or 22%, offset by a decrease in REO Sales Volume and $1.9 million in lower shipping and freight costs, which are included in cost of sales but excluded from Production Cost per REO MT. The increase in Production Cost per REO MT was driven by higher payroll costs, including the increase in employee headcount to support the expansion of operations, and to a lesser extent, higher materials and supplies costs. Shipping and freight costs decreased primarily due to year-over-year declines in trucking rates and diesel fuel prices.
Cost of sales for the nine months ended September 30, 2023, increased year over year, primarily due to an increase in Production Cost per REO MT of $316 or 19%, which was driven by higher payroll costs, including the increase in employee headcount to support the expansion of operations, and to a lesser extent, higher materials and supplies costs. The increase in cost of sales was partially offset by $4.4 million in lower shipping and freight costs for the nine months ended September 30, 2023, as compared to the prior year period, primarily due to year-over-year declines in trucking rates and diesel fuel prices. Production Cost per REO MT varies period to period based on the timing of scheduled outages of our production facilities for maintenance. 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; and certain environmental, health, and safety expenses.
Selling, general and administrative expenses increased by $1.8 million, or 10% for the three months ended September 30, 2023 and by $1.7 million, or 3% for the nine months ended September 30, 2023, as compared to the respective prior year periods. The increases in selling, general and administrative expenses were primarily due to higher personnel costs (other than stock-based compensation expense), which increased by $2.1 million and $4.9 million, respectively, along with other general and administrative costs required to further build out our corporate infrastructure in support of our downstream expansion. The increases in selling, general and administrative expenses were partially offset by $1.7 million and $7.1 million decreases in stock-based compensation expense for the three and nine months ended September 30, 2023, respectively, when compared to the respective prior year periods, due primarily to the timing of grants and the recognition of stock-based compensation on an accelerated basis for virtually all of our stock awards.
Advanced projects, start-up, development and other consists principally of start-up costs associated with restarting an existing facility or commissioning a new facility, circuit or process of our production, manufacturing, or separations facilities prior to achievement of commercial production; costs incurred in connection with research and development of new processes or to significantly enhance our existing processes; as well as costs incurred to support growth initiatives or pursue other opportunities.
Advanced projects, start-up, development and other for the three and nine months ended September 30, 2023, increased year over year by $7.6 million and $19.5 million, respectively, which was primarily driven by $5.9 million and $12.3 million, respectively, in higher start-up costs, that predominantly relate to certain costs that do not qualify for capitalization, such as salaries and wages, outside services, parts, and training, used or consumed directly in the commissioning and starting up of our Stage II circuits and facilities that were not yet in commercial production. The remaining increases primarily relate to costs incurred to support growth initiatives or pursue other opportunities.
Depreciation, depletion and amortization primarily consists of depreciation of property, plant and equipment and depletion of mineral rights. The year-over-year increase in depreciation, depletion and amortization for the three and nine months ended September 30, 2023, primarily reflects an increase in depreciation of $14.6 million and $24.7 million, respectively, resulting from the continued placement of new circuits and facilities associated with our Stage II optimization project into service, which began at the end of the fourth quarter of 2022.
Accretion of asset retirement and environmental obligations is based on the estimated future cash flows required to reclaim certain land areas associated with mineral extraction activities and certain 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, 2023, decreased year over year primarily as a result of a decrement to our asset retirement obligation during the third quarter of 2022, which reduced the accretion of our asset retirement obligation in subsequent periods.
Loss on disposals of long-lived assets, net consists of gains or losses on the disposals of property, plant and equipment, as well as demolition costs. The year-over-year increase in loss on disposals of long-lived assets, net, for the three and nine months ended September 30, 2023, principally relates to demolition costs incurred in connection with demolishing and removing certain out-of-use older facilities and infrastructure from the Mountain Pass site to accommodate future expansion in rare earth processing.
Interest expense, net principally consists of expense associated with the 0.25% per annum interest rate and amortization of the debt issuance costs on our Convertible Notes (as defined in the “Liquidity and Capital Resources” section below) and amortization of the discount on a previous debt obligation to Shenghe, offset by capitalized interest. Interest expense, net for the nine months ended September 30, 2023, decreased year over year due to the full repayment of the debt obligation to Shenghe in the first quarter of 2022.
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, 2023, increased year over year as a result of interest and investment income earned on our short-term investments, which were purchased starting in the second quarter of 2022. Interest and investment income is principally generated from accretion of the discount on such investments.
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 tax expense as a percentage of income before income taxes) was 4.5% and 24.5% for the three and nine months ended September 30, 2023, respectively, as compared to 24.9% and 24.5% for the three and nine months ended September 30, 2022, respectively. The effective tax rate for the three and nine months ended September 30, 2023, differed from the statutory tax rate of 21% primarily due to state income tax expense and a deduction limitation on officers’ compensation, offset by the Section 45X Advanced Manufacturing Production Credit
and the California Competes Tax Credit (“CCTC”). The effective tax rate for the three and nine months ended September 30, 2022, differed from the statutory tax rate of 21% primarily due to state income tax expense and a deduction limitation on officers’ compensation, partially offset by the CCTC.
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. We do not expect the minimum tax or excise tax to have a material impact on our unaudited Condensed Consolidated Financial Statements. We expect to benefit from the Section 45X Advanced Manufacturing Production Credit, which provides a credit equal to 10% of the costs incurred with respect to the production and sale of certain critical minerals, including NdPr oxide.
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 quarters. Finally, starting in the third quarter of 2023, as we ramp up production of separated rare earth materials, we expect that significant volumes of REO produced will be retained for separation and not sold as concentrate.
As noted above, as we evolve as a business and transition from a producer of rare earth concentrate to a producer of separated rare earth products, the metrics that management anticipates using to evaluate the business may change or be revised.
The following table presents our KPIs for the quarterly periods indicated:
| FY2023 | FY2022 | FY2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in whole units or dollars) | Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | Q4 | Q3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Rare earth concentrate | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| REO Production Volume (MTs) | 10,766 | 10,863 | 10,671 | 10,485 | 10,886 | 10,300 | 10,828 | 10,261 | 11,998 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| REO Sales Volume (MTs) | 9,177 | 10,271 | 10,215 | 10,816 | 10,676 | 10,000 | 11,706 | 9,674 | 12,814 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Realized Price per REO MT | $ | 5,718 | $ | 6,231 | $ | 9,365 | $ | 8,515 | $ | 11,636 | $ | 13,918 | $ | 13,818 | $ | 10,101 | $ | 7,693 | |||||||||||||||||||||||||||||||||||||||||||||||
| Production Cost per REO MT | $ | 2,020 | $ | 1,938 | $ | 1,978 | $ | 1,928 | $ | 1,653 | $ | 1,750 | $ | 1,594 | $ | 1,525 | $ | 1,449 | |||||||||||||||||||||||||||||||||||||||||||||||
| Separated NdPr products | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| NdPr Production Volume (MTs) | 50 | N/A | N/A | N/A | N/A | N/A | N/A | N/A | N/A | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| NdPr Sales Volume (MTs) | — | N/A | N/A | N/A | N/A | N/A | N/A | N/A | N/A | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| N/A = Not applicable as there was neither NdPr production nor sales volume in these periods. |
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, 2023, we had $1,084.7 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, as evidenced by the volatility experienced in 2022, especially in light of the COVID-19 pandemic, including the emergence of new and potential future variants. Volatility in the market price of REO has continued in 2023 due to concerns over the global economic conditions and actual or perceived concerns over increases in the supply of and/or decreases in demand for rare earth products.
Our current working capital needs relate mainly to our mining and beneficiation operations. However, as we transition to selling separated rare earth products, and advance our Stage III magnetics initiatives, we anticipate our working capital needs will continue to increase. With our Stage II optimization project substantially complete, our principal capital expenditure requirements relate mainly to developing the HREE Facility, further investing in Mountain Pass, and constructing the Fort
Worth Facility, as well as periodic repairs and maintenance of mining and rare earth processing equipment. Our future capital requirements will also depend on several other 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 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 up to approximately $270 million of capital costs in 2023. We expect to incur further costs for the HREE Facility and the Fort Worth Facility in 2024, in addition to investing in other growth and maintenance projects.
Our estimated costs or estimated time to complete and commission 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 our 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 our environmental impact and/or enable the production of low-carbon technologies. Pending such allocation of the net proceeds to eligible green projects, we may use the net proceeds from the Convertible Notes offering for general corporate purposes.
Equipment Notes: We have previously entered into several financing agreements for the purchase of equipment, including trucks, tractors, loaders, graders, and various other machinery. As of September 30, 2023, we had $5.3 million in principal (and accrued interest) outstanding under the equipment notes.
Leases: We have lease arrangements for certain equipment and facilities, including office space, vehicles and equipment used in our operations. As of September 30, 2023, we had future expected lease payment obligations totaling $10.5 million, with $0.9 million due within the next 12 months. See Note 9, “Leases,” in the notes to the unaudited Condensed Consolidated Financial Statements for further information.
Asset Retirement and Environmental Obligations: See Note 7, “Asset Retirement and Environmental Obligations,” in the notes to the unaudited Condensed Consolidated Financial Statements for our estimated cash requirements to settle asset retirement and environmental obligations.
Cash Flows
The following table summarizes our cash flows:
| For the nine months ended September 30, | Change | ||||||||||||||||||||||||||||||||||||||||
| (in thousands, except percentages) | 2023 | 2022 | $ | % | |||||||||||||||||||||||||||||||||||||
| Net cash provided by (used in): | |||||||||||||||||||||||||||||||||||||||||
| Operating activities | $ | 76,480 | $ | 314,419 | $ | (237,939) | (76) | % | |||||||||||||||||||||||||||||||||
| Investing activities | $ | 337,831 | $ | (1,041,727) | $ | 1,379,558 | N/M | ||||||||||||||||||||||||||||||||||
| Financing activities | $ | (8,577) | $ | (19,435) | $ | 10,858 | (56) | % |
N/M = Not meaningful.
Net Cash Provided by Operating Activities: Net cash provided by operating activities decreased by $237.9 million for the nine months ended September 30, 2023, as compared to the prior year period, reflecting a decrease in revenue, an increase in inventories to support our Stage II separations facilities as well as our Stage III initiatives, and a $6.3 million increase in cash paid for income taxes, as compared to the prior year period. The decrease in net cash provided by operating activities was partially offset by a $19.9 million increase in interest received on our short-term investments and money market funds for the nine months ended September 30, 2023, as compared to the prior year period. In addition, $13.6 million of our revenue 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, with no similar amount in the current year period.
Net Cash Provided by (Used in) Investing Activities: Net cash provided by investing activities was $337.8 million for the nine months ended September 30, 2023, compared to net cash used in investing activities of $1,041.7 million in the prior year period. The change related primarily to $705.1 million in higher gross sales and maturities of short-term investments, coupled with $653.1 million in lower purchases of short-term investments when compared to the prior year period. Additions to property, plant and equipment for the nine months ended September 30, 2023, decreased by $25.4 million when compared to the prior year period, and related primarily to construction spend on our Stage II optimization project, the Fort Worth Facility, and the HREE Facility.
Net Cash Used in Financing Activities: Net cash used in financing activities decreased by $10.9 million for the nine months ended September 30, 2023, as compared to the prior year period, reflecting lower tax withholding on stock-based awards and lower principal payments on debt obligations and finance leases, principally due to a $2.9 million payment to Shenghe in the prior year period to fully satisfy the debt obligation.
Non-GAAP Financial Measures
We present Adjusted EBITDA, Adjusted Net Income, Adjusted Diluted EPS, Production Costs, 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. Adjusted EBITDA, Adjusted Net Income, Adjusted Diluted EPS, Production Costs, and Free Cash Flow are not intended to be substitutes for any GAAP financial measures 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. As noted above, we no longer utilize Total Value Realized since we do not expect to receive any additional tariff rebates, which we previously adjusted from our revenue as determined in accordance with GAAP.
Adjusted EBITDA
We calculate Adjusted EBITDA as our GAAP net income or loss 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; start-up costs; transaction-related and other non-recurring costs; accretion of asset retirement and environmental obligations; gain or loss on disposals of long-lived assets; 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 (loss), which is determined in accordance with GAAP:
| For the three months ended September 30, | For the nine months ended September 30, | ||||||||||||||||||||||
| (in thousands) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Net income (loss) | $ | (4,276) | $ | 63,177 | $ | 40,566 | $ | 221,997 | |||||||||||||||
| Adjusted for: | |||||||||||||||||||||||
| Depreciation, depletion and amortization | 16,751 | 2,096 | 37,076 | 12,763 | |||||||||||||||||||
| Interest expense, net | 1,396 | 1,224 | 4,147 | 4,455 | |||||||||||||||||||
| Income tax expense (benefit) | (200) | 20,934 | 13,166 | 72,067 | |||||||||||||||||||
| Stock-based compensation expense(1) | 6,298 | 7,806 | 19,041 | 25,019 | |||||||||||||||||||
| Start-up costs(2) | 7,082 | 1,383 | 15,474 | 3,703 | |||||||||||||||||||
| Transaction-related and other non-recurring costs(3) | 1,642 | 502 | 7,124 | 638 | |||||||||||||||||||
| Accretion of asset retirement and environmental obligations | 227 | 418 | 681 | 1,255 | |||||||||||||||||||
| Loss on disposals of long-lived assets, net | 1,087 | — | 5,897 | 258 | |||||||||||||||||||
| Other income, net | (14,456) | (6,168) | (41,970) | (8,574) | |||||||||||||||||||
| Adjusted EBITDA | $ | 15,551 | $ | 91,372 | $ | 101,202 | $ | 333,581 |
(1)Principally included in “Selling, general and administrative” within our unaudited Condensed Consolidated Statements of Operations.
(2)Relates to certain costs included in “Advanced projects, start-up, development and other” within our unaudited Condensed Consolidated Statements of Operations that do not qualify for capitalization incurred in connection with the initial commissioning and starting up of our separations capability at Mountain Pass and our metal alloy and magnet-making capabilities at Fort Worth prior to the achievement of commercial production. These costs include payroll of employees directly involved in such commissioning activities, training costs, costs of testing and commissioning the new circuits and processes, and other related costs. Given the nature and scale of the related costs and activities, management does not view these as normal, recurring operating expenses, but rather as non-recurring investments to develop such capabilities. Therefore, we believe it is useful and necessary for investors to understand our core operating performance in current and future periods by excluding the impact of these start-up costs.
(3)The majority of the amounts are included in “Advanced projects, start-up, development and other” within our unaudited Condensed Consolidated Statements of Operations, and pertain to legal, professional services, and other costs associated with non-recurring transactions.
Adjusted Net Income and Adjusted Diluted EPS
We calculate Adjusted Net Income as our GAAP net income or loss excluding the impact of stock-based compensation expense; start-up costs; transaction-related and other non-recurring costs; gain or loss on disposals of long-lived assets; 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 or loss per share (“EPS”) excluding the per share impact, using adjusted diluted weighted-average shares outstanding, of stock-based compensation expense; start-up costs; transaction-related and other non-recurring costs; gain or loss on disposals of long-lived assets; 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 performance. 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. 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.
The following table presents a reconciliation of our Adjusted Net Income, which is a non-GAAP financial measure, to our net income (loss), which is determined in accordance with GAAP:
| For the three months ended September 30, | For the nine months ended September 30, | ||||||||||||||||||||||
| (in thousands) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Net income (loss) | $ | (4,276) | $ | 63,177 | $ | 40,566 | $ | 221,997 | |||||||||||||||
| Adjusted for: | |||||||||||||||||||||||
| Stock-based compensation expense(1) | 6,298 | 7,806 | 19,041 | 25,019 | |||||||||||||||||||
| Start-up costs(2) | 7,082 | 1,383 | 15,474 | 3,703 | |||||||||||||||||||
| Transaction-related and other non-recurring costs(3) | 1,642 | 502 | 7,124 | 638 | |||||||||||||||||||
| Loss on disposals of long-lived assets, net | 1,087 | — | 5,897 | 258 | |||||||||||||||||||
| Other | (1) | (23) | (42) | (247) | |||||||||||||||||||
| Tax impact of adjustments above(4) | (4,806) | (2,299) | (12,684) | (7,170) | |||||||||||||||||||
| Release of valuation allowance(5) | — | (2,427) | — | (2,427) | |||||||||||||||||||
| Adjusted Net Income | $ | 7,026 | $ | 68,119 | $ | 75,376 | $ | 241,771 |
(1)Principally included in “Selling, general and administrative” within our unaudited Condensed Consolidated Statements of Operations.
(2)Relates to certain costs included in “Advanced projects, start-up, development and other” within our unaudited Condensed Consolidated Statements of Operations that do not qualify for capitalization incurred in connection with the initial commissioning and starting up of our separations capability at Mountain Pass and our metal alloy and magnet-making capabilities at Fort Worth prior to the achievement of commercial production. These costs include payroll of employees directly involved in such commissioning activities, training costs, costs of testing and commissioning the new circuits and processes, and other related costs. Given the nature and scale of the related costs and activities, management does not view these as normal, recurring operating expenses, but rather as non-recurring investments to develop such capabilities. Therefore, we believe it is useful and necessary for investors to understand our core operating performance in current and future periods by excluding the impact of these start-up costs.
(3)The majority of the amounts are included in “Advanced projects, start-up, development and other” within our unaudited Condensed Consolidated Statements of Operations, and pertain to legal, professional services, and other costs associated with non-recurring transactions.
(4)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 29.8%, 26.7%, 23.8% and 24.4% for the three and nine months ended September 30, 2023 and 2022, respectively.
(5)Reflects the impact of a release of a portion of our valuation allowance.
The following table presents a reconciliation of our Adjusted Diluted EPS, which is a non-GAAP financial measure, to our diluted earnings (loss) per share, which is determined in accordance with GAAP:
| For the three months ended September 30, | For the nine months ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Diluted earnings (loss) per share | $ | (0.02) | $ | 0.33 | $ | 0.22 | $ | 1.16 | |||||||||||||||
| Adjusted for: | |||||||||||||||||||||||
| Stock-based compensation expense | 0.03 | 0.04 | 0.10 | 0.13 | |||||||||||||||||||
| Start-up costs | 0.04 | 0.01 | 0.08 | 0.02 | |||||||||||||||||||
| Transaction-related and other non-recurring costs | 0.01 | — | 0.04 | — | |||||||||||||||||||
| Loss on disposals of long-lived assets, net | 0.01 | — | 0.03 | — | |||||||||||||||||||
| Tax impact of adjustments above(1) | (0.03) | (0.01) | (0.07) | (0.03) | |||||||||||||||||||
| Release of valuation allowance | — | (0.01) | — | (0.01) | |||||||||||||||||||
| Adjusted Diluted EPS | $ | 0.04 | $ | 0.36 | $ | 0.40 | $ | 1.27 | |||||||||||||||
| Diluted weighted-average shares outstanding**(2)** | 177,231,717 | 193,409,857 | 193,632,662 | 193,438,939 | |||||||||||||||||||
| Assumed conversion of restricted stock(3) | 582,144 | — | — | — | |||||||||||||||||||
| Assumed conversion of restricted stock units(3) | 438,803 | — | — | — | |||||||||||||||||||
| Adjusted diluted weighted-average shares outstanding**(2)(3)** | 178,252,664 | 193,409,857 | 193,632,662 | 193,438,939 |
(1)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 29.8%, 26.7%, 23.8% and 24.4% for the three and nine months ended September 30, 2023 and 2022, respectively.
(2)The Convertible Notes were antidilutive for both GAAP purposes and for purposes of calculating Adjusted Diluted EPS for the three months ended September 30, 2023.
(3)The assumed conversion of restricted stock and restricted stock units was antidilutive for GAAP purposes for the three months ended September 30, 2023. For purposes of calculating Adjusted Diluted EPS, we have added back the assumed conversion of restricted stock and restricted stock units since they would not be antidilutive when using Adjusted Net Income as the numerator in the calculation of Adjusted Diluted EPS.
Production Costs
Production Costs, which we use to calculate our KPI, Production Cost per REO MT, is a non-GAAP financial measure. Production Cost per REO MT is a key indicator of our concentrate production efficiency. As mentioned above, in completing the transition to separated rare earth products, we may determine that Production Cost per REO MT, which is a metric focused solely on Stage I concentrate operations, and consequently, Production Costs, are no longer meaningful in evaluating and understanding our business or operating results.
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) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Cost of sales (excluding depreciation, depletion and amortization) | $ | 22,217 | $ | 22,417 | $ | 69,137 | $ | 67,682 | |||||||||||||||
| Adjusted for: | |||||||||||||||||||||||
| Stock-based compensation expense(1) | (842) | (889) | (2,759) | (2,110) | |||||||||||||||||||
| Shipping and freight | (1,867) | (3,796) | (6,150) | (10,548) | |||||||||||||||||||
| Other | (968) | (89) | (1,582) | (1,225) | |||||||||||||||||||
| Production Costs | 18,540 | 17,643 | 58,646 | 53,799 | |||||||||||||||||||
| Divided by: | |||||||||||||||||||||||
| REO sales volume (in MTs) | 9,177 | 10,676 | 29,663 | 32,382 | |||||||||||||||||||
| Production Cost per REO MT (in dollars) | $ | 2,020 | $ | 1,653 | $ | 1,977 | $ | 1,661 |
(1)Pertains only to the amount of stock-based compensation expense included in “Cost of sales” within our unaudited Condensed Consolidated Statements of Operations.
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) | 2023 | 2022 | |||||||||
| Net cash provided by operating activities**(1)** | $ | 76,480 | $ | 314,419 | |||||||
| Additions to property, plant and equipment, net(2) | (187,877) | (209,202) | |||||||||
| Free Cash Flow | $ | (111,397) | $ | 105,217 |
(1)Under the terms of the A&R Offtake Agreement and pursuant to the accounting treatment thereof, $13.6 million of our revenue for the nine months ended September 30, 2022, was 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, 2023 and 2022, are net of $1.1 million and $5.1 million, respectively, in proceeds from government awards used for construction.
Critical Accounting Policies
A complete discussion of our critical accounting policies is included in our Form 10-K for the year ended December 31, 2022. There have been no significant changes in our critical accounting policies during the three months ended September 30, 2023.
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.
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