MP Materials - Q2 2023
August 3, 2023
Transcript
Operator (participant)
Good afternoon, ladies and gentlemen. Thank you for joining today's MP Materials Second Quarter 2023 Earnings Call and Webcast. My name is Tia, I will be your moderator for today's call. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. If you would like to ask a question, please press star one on your telephone keypad. I would now like to pass the conference over to your host, Head of Investor Relations, Martin Sheehan. Please proceed.
Martin Sheehan (SVP of Investor Relations)
Thank you, Operator. Good afternoon, everyone. Welcome to MP Materials Second Quarter 2023 Earnings Conference Call. With me today from MP Materials are Jim Litinsky, Founder, Chairman, and Chief Executive Officer, Michael Rosenthal, Founder and Chief Operating Officer, and Ryan Corbett, Chief Financial Officer. As a reminder, today's discussion will contain forward-looking statements relating to future events and expectations that are subject to various assumptions and caveats. Factors that may cause the company's actual results to differ materially from these statements are included in today's presentation, earnings release, and in our SEC filings. In addition, we have included some non-GAAP financial measures in this presentation. Reconciliations to the most directly comparable GAAP financial measures can be found in today's earnings release and the appendix to today's slide presentation. Any reference in our discussion today to EBITDA means adjusted EBITDA.
Finally, the earnings release and slide presentation are available on our website. With that, I'll turn the call over to Jim. Jim?
Jim Litinsky (Founder, Chairman, and CEO)
Thanks, Martin. Thank you all for joining us today. Let me give you a brief overview of today's call. To begin, I will discuss the second quarter and more recent highlights. Ryan will then run through the financials and KPIs, followed by Michael, who will review stage two progress. I will then provide some closing commentary before Q&A. Let's begin on slide four and jump right to the middle of the slide under stage two for important and exciting news. We have officially started production of separated rare earths at Mountain Pass. Michael and the team have done an incredible job on stage two, particularly over the last several months to advance commissioning.
Let me be very clear, we still have a lot of work to do to get each circuit to operate reliably and ramp up production volumes, but the chemistry and separations processes are working as expected. We expect to begin shipping separated NdPr oxide to customers this quarter. With the critical caveat that we must still work relentlessly towards our mission, I want to reiterate that achieving refined rare earth production is a milestone worth celebrating for all of us at MP, our shareholders, as well as everyone in America. Moving back to the left of the slide, in the second quarter, we achieved record stage one production for a quarter which included a planned maintenance shutdown. In fact, this was our third highest quarterly production volume ever, with the only two greater quarters being ones where we did not have a one-week planned shutdown.
This translated into strong financial performance despite difficult pricing comparisons, and Ryan will provide more detail on this in a moment. Nonetheless, the team's stage one execution this quarter was very impressive, especially when we consider all the activity on our site related to stage two commissioning and those achievements. Lastly, our stage three downstream magnetics business continues to advance across many functions. We are now installing some of the first metal and alloy making equipment in our Fort Worth facility. Other key equipment is in transit with the goal to begin installation during the remainder of the year. Fort Worth is going to be the epicenter of magnetics in the Western world. Along with the scaled metal, alloy, and magnet manufacturing, we are establishing a state-of-the-art R&D, piloting, and product development area at the facility.
Some of this equipment is already in the process of being installed, and we continue to make important hires across the magnetics team. In fact, MP, the company overall, just surpassed the 600 employee mark. Yet, as we add depth and expertise across our sites in Mountain Pass, Dallas Fort Worth, and Las Vegas, we remain maniacally focused on preserving our owner/operator culture. With that, let me turn it over to Ryan. Ryan?
Ryan Corbett (CFO)
Thanks, Jim. Turning to slide six, as Jim mentioned, stage one production continued at impressive rates as we produced 10,863 tons of REO in concentrate in the quarter. Modest improvements in uptime, ore grade, and feed rate combined to drive a 5% increase in production volumes compared to last year. The improved feed grade and feed rate, combined with strong recoveries, to produce the second highest plant productivity, which we measure in tons of REO per hour of uptime in our history, demonstrating the steady progress in improving efficiency in the flotation process. Moving to sales volumes, the higher production led to 3% growth in sold volume, reaching 10,271 metric tons in the quarter. This is despite an increasing amount of production being sent through the various stage two circuits as we commission them.
As a reminder, we expect about two weeks of production or a bit under 2,000 metric tons of REO to be absorbed permanently into the downstream circuits as stage two production ramps, and through June, we have seen about 1/3 of that total consumed. The last 2/3 will likely be consumed, and therefore not available for sale, over the next two quarters. Realized pricing in the quarter fell 55% year-over-year, driven by the decline in the price of NdPr, which represents the lion's share of the value of the REOs in concentrate. The decline was slightly better than we thought it would be when we last spoke in May, as NdPr pricing had a modest uptick for part of the quarter.
Since then, pricing has again fallen into the low to mid $60 per kilogram, and as such, right now, we are likely to see a low teens percentage decline in sequential realized prices in Q3. Lastly, on the far right, production costs climbed 11% over last year, in part from the growth in our headcount as we commission stage two and prepare it for full operations. To a lesser extent, we continue to see slight year-over-year growth in materials and supplies cost. One area that has been a real positive is our combined heat and power plant, where we have been able to reduce outside vendor and third-party training costs as our own MP staff has gained critical experience, driven plant efficiencies, and operated with fewer bugs.
We expect these kinds of successes will come over time with other parts of our stage two process and as we attain targeted reliability from the operating equipment. As a reminder, as we move to the back half of the year and begin preparing to migrate to stage two production, some of these stage one KPIs will sunset as we evolve our reporting to focus on our transition to separated products and rare earth metal sales. Moving to slide seven. On the far left of the slide, revenue of $64 million declined by 55%, driven by the lower realized pricing we just discussed, as well as a small amount of rare earth fluoride sales in last year's second quarter. Given the nature of our commodity business, the $79.5 million drop in revenue drove a similar decline in adjusted EBITDA to $27 million.
The third graphic on the page highlights that tightly managing our cost structure, combined with the low-cost nature of our scaled facility and world-class ore body, allowed us to generate a very robust 42% adjusted EBITDA margin, particularly when considering recent NdPr market pricing. I would also point out that despite the very weak pricing in the quarter, stage one continued to generate a modest amount of positive, normalized free cash flow when removing our growth CapEx of $53 million in the quarter, and that was with a significant cash tax payment in April. Moving to the far right of the slide, our adjusted diluted EPS declined to $0.09 in the quarter, primarily driven by the lower adjusted EBITDA. Three quick comments on some below-the-line items, which had modest impacts on our adjusted EPS.
With the current interest rate environment, we continue to put our large cash balance to work for us, primarily in short-term treasury securities, generating over $10 million a quarter in interest income, recognized on the other income line of our income statement. Second, with us putting over $300 million of assets into service over the last year, we are starting to see our quarterly depreciation expense tick up as we would expect. As such, we would expect a roughly 50% sequential increase in the depreciation, depletion, and amortization line item in Q3, with some additional growth in Q4 as we also start putting some of our stage three assets into service. While we are on the related topic of CapEx, we continue to expect about $300 million of spend in 2023, having spent about $130 million through June.
Lastly, on the P&L, whereas total income tax expense in the quarter was down year-over-year due to the lower pre-tax income, our updated expectation for full-year effective tax rate increased slightly, which caused an outsized impact on Q2's rate. With additional information and research on how we expect to implement the IRA bill's 45X provision, we have upped our full-year tax rate for GAAP purposes to the mid-20s. To be clear, we have not updated our view on the cash benefits of the company, which we expect to be meaningful, but from a GAAP perspective, those benefits to the income statement may be spread over a longer period. The updated full-year tax forecast created a catch-up for the first half, which looked outsized in Q2, given the much lower sequential pre-tax income. Looking at the whole first half, our effective tax rate was roughly 23%.
Before turning it to Michael, I would also remind everyone that when we do begin shipping NdPr oxide, the actual sales cycle is going to be longer, depending on where the product is delivered. For example, much of our initial production of NdPr oxide will be converted to metal by tollers in Southeast Asia before being delivered to our end customers. Shipping times alone to Southeast Asia will likely take three to four weeks, not to mention the needed inventory build at the toller's facility, as well as production and delivery times. As such, we expect NdPr oxide revenue will likely be recognized predominantly in Q1 for the shipments that begin starting this quarter. With that, I'll turn it over to Michael. Michael?
Michael Rosenthal (Founder and COO)
Thanks, Ryan. Turning to slide eight. Q2 was a very productive and busy quarter for the Mountain Pass operation. Concentrate production and product grade increased modestly year-over-year, despite the semi-annual plant shutdown. This is partially attributable to less unplanned downtime and is a solid accomplishment, considering the very intense cross-training, personnel reallocation, and resource-sharing challenges presented by the stage two commissioning. The results also reflect, to some extent, the fruits of continued optimization efforts in metallurgy and operational execution. As a reminder, we expect generally stable stage one production year-over-year in the short term, but hope to achieve periodic step changes in output tied to certain discrete projects in our pipeline. Commissioning activity and breadth accelerated throughout the quarter and into Q3. All stage two circuits are now in active operation. My previous comments remain valid.
Commissioning is a process that demands patience and perseverance, with very hard-fought steps forward and frustrating setbacks. However, overall, I am quite encouraged with the progress. Most importantly, we have so far avoided any major health and safety incidents, though we cannot become complacent. I'd like to thank our employees throughout the organization for their hard work, flexibility, and resilience during this stressful time. In Q2, and more so into Q3, we began bulk and individual separations and began product finishing. In Q3, we expect to begin modest shipments of NdPr oxide, along with lanthanum and cerium products, and the production of SEG+. We are pleased that the process chemistry and major equipment appear capable of operating in line with the stage two design basis. We view this as a major success, given the complexity of the process.
Our confidence extends across the hydrometallurgy, rare earth separation, and product finishing circuits, but it is still early days, and each piece of equipment and process experiences its own challenges along the path to stability. We had the enormous advantage of inheriting an NdPr separation facility that has produced on-spec materials in the past, and it was recommissioned in a manner that allows us to quickly produce on-spec material again. To avoid forfeiting this advantage that shaved many months off the commissioning process, we continue to proceed prudently, both upstream and in our separation circuit. In regards to the trajectory, stage two operational performance, as with stage one, hinges on consistent and safe execution and how this manifests in uptime, mineral recovery, and throughput.
With the prior phase of commissioning and commercial operations behind us, we are now working towards achieving incrementally higher uptimes in certain circuits while maintaining modest throughput, identifying and resolving temporary bottlenecks before ramping throughput to our targeted run rate. As we do so, we are, as we fully anticipated, seeing inconsistencies in the performance of certain areas of the plant more regularly than we expect in stabilized operations. While we are confident that the chemistry works, inconsistencies can come from a wide variety of sources, including new and legacy instruments and automation controls programming, secondary process equipment, and material handling. As I've said previously, we remain focused on the overall mission and will not sacrifice long-term success, sustainability, and profitability of our operation for near-term announcements. The bottom line is that we are overwhelmed by the commitment of our team and very pleased with our stage two progress.
With that, I'll turn it back over to Jim.
Jim Litinsky (Founder, Chairman, and CEO)
Thanks, Michael. Before we go to Q&A, I wanted to provide some updated perspective on our industry and the general supply-demand environment, both present and future. NdPr pricing remained weak throughout the quarter, trading in an approximate range in the low to mid-$60s per kilogram. This was mainly a continuation of the conditions we discussed in May. We see the electric vehicle and e-mobility categories experiencing strong growth. We expect those to continue to grow at least 20%-30% per year for quite some time. However, industrial applications, wind turbines, hard disk drives, speakers for PCs and smartphones, and other consumer electronics applications have been weak throughout 2023. Certainly, the economic conditions in China are hitting those categories significantly.
As a reminder, though, the split between electric transport and then all the other industrial and consumer applications in our industry is currently approximately 25% to 75%, respectively. This means that in the near term, a 5% hiccup in those traditional spaces can effectively wipe out the accelerating demand in EVs. Of course, this is a short-term phenomenon because the compounding effect of growth verticals begins to trump the influence of legacy industries within a couple of years. Of course, the volatile nature here works both ways. On the supply side, we think 2023 has been impacted by the reopening of the border between Myanmar and China. We understand that there was a fair amount of pent-up inventory from Myanmar mining production that entered China over the first six months of the year.
I would encourage anyone interested to Google for stories about toxic rare earth mining and human rights abuses in Myanmar. This supply obviously interferes with normal market forces and, more importantly, hurts American national security and humanity. We expect, though, that this relative impact of supply is transitory. Net-net, as I have said many times before, anything can happen in commodities prices in the short term. That said, we view the recent soft pricing environment as explainable by identifiable market factors on both the demand and the supply side that fortunately seem to be mostly behind us. From our vantage point, the long-term prospects for our industry and the value of our platform remain extraordinary. On that note, we thought we would be doing shareholders and the quants a disservice if we did not at least mention the words artificial intelligence on today's call.
Let's go ahead and move to slide nine. All these pictures were created using the Bing Image Creator, which is powered by DALL-E. We had a little competition internally here at MP to see who could do the best prompting to generate images that outline how exciting MP's opportunity is in this new AI future. The picture on the left is what rare earth mining could look like in the year 2040. This one is somewhat fantastical, but I think now we have some better ideas for what Michael's next uniform might look like. The second image is what is supposed to be the Chicago skyline a couple of decades from now, where EVs, autonomous vehicles, eVTOL, and drones are dominant modes of electric transport or motion.
I think we would all agree that this is a reasonable depiction of what might be a reality in the not-so-distant future. This is a world where the demand for rare earth magnetics is many multiples of what we see today. The third slide is where things get interesting. Here, we have both quadrupedal and bipedal robots. The more colloquial terms you might have otherwise heard for these are robot dogs and humanoid robots. At first blush, even as recently as earlier this year before the launch of ChatGPT, these objects might have seemed like totally distant fantasies, but we are already seeing companies apply large language models to robots like these. Just check out YouTube, where you can see a number of videos where various companies are showing off robots just like these that are able to be directed with spoken language.
Robots use small motors called actuators in their joints to enable movement and provide balance, strength, and dexterity. Magnets, primarily rare earth magnets, are what power that motion. In simple terms, think of an EV as essentially a robot on wheels. It has a large battery, and in most cases, a rare earth magnet in its motor, transforming the stored energy into motion. A robot has a small battery and then lots of actuators around its structure. When size, weight, and performance matter, rare earth magnets win. For many robotics use cases, a rare earth permanent magnet is likely going to be the only solution for certain actuators. How this will all play out and over what time frame is anyone's guess. For a rough order of magnitude, though, today's quadrupedal and bipedal robots might use anywhere between 0.2 kg and 3 kg of NdPr.
A robot doing a major strength task or one needing balance for some kind of security or military case is likely going to need even more NdPr per unit than 3 kg. This compares to about 0.5 kg-1.5 kg in a typical EV. Roughly 85 million cars are produced per year, and there are about 1.4 billion cars on the road. Earlier this year, Elon Musk predicted that AI robots would eventually outnumber humans. If he turns out to be correct, it would suggest that the size of the opportunity for MP will be many multiples that of EVs. Moreover, in EV applications, rare earths have maintained a 90%+ share, even as there is an understandable conversation around the trade-offs of significantly better performance with rare earths versus the cost and/or supply chain availability and other risks.
In robotics, given the space limitations and performance needs, it is very likely that there will be a significant percentage of use cases where substitution is just not feasible at any price. I would also add that it is also less likely that the Chinese are going to want to provide magnets to American companies in an area with such direct military application. To conclude, AI excitement is playing out right now in the public markets via the chip companies, mega cap tech, and a handful of other companies. Profound change from AI over time is likely going to come from the next layer of innovation on top of the infrastructure layer. Robotics is going to be an important disruptive vertical where we believe AI is pulling forward into the next few years what might have taken decades.
I do not know when, but at some point, investors are going to start to price that into platforms like ours, too. With that, let's open it up to questions. Operator?
Operator (participant)
Absolutely. We will now begin the QA session. If you would like to ask a question, please press star followed by one on your touch-tone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, press star one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly to allow questions to generate in queue. The first question comes from the line of Matt Summerville with D.A. Davidson. Please proceed.
Matt Summerville (Managing Director and Senior Research Analyst)
Thanks. Good evening. Two questions, I think, guys. First, Jim, the comment you made around Myanmar, can you talk about whether you think that supply spigot, if you will, inbound into China, has normalized at this point? Or do you still feel like there's still some excess inventory to be brought over the border, so to speak? Well, I guess that's literal.
Jim Litinsky (Founder, Chairman, and CEO)
Sure. Hey, Matt, thanks for the question. Myanmar is tough to really know, but what I would say is, you know, it was that border was shut off for the most part, and there was a lot of inventory that built. And, from, you know, everything that we have heard, that was a sort of a huge rush of supply, that came through kind of throughout this year.
We think it's sort of a one-time impact of excess supply. You know, we believe there's been a recent crackdown on that. I guess that's a long-winded way of saying we, you know, our, our belief is that that's pretty transitory, but as an impact. Obviously, that supply exists in some form. You know, that's what we see from this standpoint.
Matt Summerville (Managing Director and Senior Research Analyst)
Got it. Then just as a follow-up, I was wondering if you could comment on, now that you've produced, you know, on-spec material, what kind of first-pass yield you're seeing out of the separation and finishing operations, and, and how that compares to where you thought those, those first-pass yields would be?
Michael Rosenthal (Founder and COO)
Thanks for the question, this is Michael. I guess there's so many parts of the process, it's hard to give you a single answer. We don't expect our initial production yields to, you know, from concentrate to finished product to be at our desired, you know, long-term yields. We expect there'll be significant improvement. But I guess what I would say is that, you know, we started up our separations process with equipment that had produced on-spec material in the past, and was restarted in a manner to quickly produce on-spec, and we're quite pleased with how the separation circuits are working. You know, similarly optimistic about how the finishing processes will work. Probably leave it at that, unless you have follow-up.
Matt Summerville (Managing Director and Senior Research Analyst)
No, we can leave it there. Thanks, Michael.
Jim Litinsky (Founder, Chairman, and CEO)
Thanks, Matt.
Operator (participant)
Thank you. The next question comes from the line of Carlos De Alba with Morgan Stanley. Please proceed.
Carlos De Alba (Research Analyst)
Yeah, thank you. Good afternoon, everyone. So Michael, I just wanted to follow up on the discussion on stage two. So is it fair to say then, based on the comments that you had earlier, that all critical steps, all critical processes, have been running and are running, and it's now just a matter of fine-tuning and making sure that you can run all the circuits and all those processes in a consistent manner, and then, you're just improving, I guess, uptime and the metrics like that. The critical steps are already all running, and you feel comfortable with that?
Michael Rosenthal (Founder and COO)
I think that's a pretty fair statement. You know, certainly the product finishing is last in line, and we can't put, you know, proxy materials into parts of those circuits to run them, so they've had less time, I would say, you know, slightly less. Yeah. Certainly, there's a little bit more work to do before we can, you know, just say that all of the bugs are worked out or that we're 100% confident. Yeah, I would say that's not chemistry there, that's just kind of physical material processing. Otherwise, I think your, your statement is correct. The, the general processes are working.
We feel comfortable that what we've designed is able to perform to the design basis of our circuits, and that, you know, with time, we'll get to greater throughput, reliability, and, you know, performance yield.
Carlos De Alba (Research Analyst)
All right. That's, that's quite encouraging. How do you feel that you are measuring against the timetable that you had, you know, planned or defined for the ramp-up of stage two? Are you on time? You think, you think you are a little bit ahead, or are you a little bit behind schedule? How would you characterize that?
Michael Rosenthal (Founder and COO)
Yeah, I think we've said all along that the process will be nonlinear, so it's sort of hard to kind of benchmark against the unexpected. We knew there'd be a lot of, you know, unexpected challenges, and, you know, we continue to see that play out. Certainly, you know, there are many challenges we anticipated, and then, you know, challenges in places that we thought would be a little bit easier. You know, overall, really proud of the team and, and how they're working through those challenges and, you know, feel comfortable that, you know, the targets we set out are, you know, remain our targets.
Carlos De Alba (Research Analyst)
Right. No, fair enough. Maybe last question for Ryan. What could you comment on the cash flow generation in the quarter? I think I calculated or we calculated something around $10 million in 2Q. That was below, you know, expectations, both consensus and our own despite the fact that you guys beat on EBITDA, right? Both also the consensus and our number. Some color there could be great.
Ryan Corbett (CFO)
Sure. Hey, Carlos. I, I think probably the missing piece on consensus versus, you know, what we actually achieved was likely a fairly significant big $20 million cash tax payment, relating to prior year taxes. Obviously, as you know, often a mismatch between, you know, P&L timing and cash flow timing on that cash tax payment. So that is the vast majority of the delta. Obviously, if you normalized for that, we would've probably significantly beat consensus on those numbers.
David Deckelbaum (Managing Director of Sustainability and Energy Transition)
All right, thanks. Thank you.
Operator (participant)
Thank you. The next question comes from the line of George Gianarikas with Canaccord Genuity. Please proceed.
George Gianarikas (Sustainability Research Analyst)
Hey, good afternoon, everyone, and thanks for taking my question. I'd just like maybe a little bit of an update as you now start to ramp NdPr production as to what you think your production costs per kilogram will be going forward?
Ryan Corbett (CFO)
Sure. Hey, George. We'll stick with George G. Well, I can take that. It's Ryan. I think what I'd say on production cost is obviously it's early. I think we've been very clear that, you know, the, the early production is going to come at a different cost structure than the run rate production, of course, as you'd expect. You know, we are obviously very proud of our position on the cost curve that's well demonstrated in our stage one business. You know, we continue to have significant confidence in maintaining that lead and that position on the cost curve as we transition to stage two separated product production.
We gave a little color to investors and analysts when we originally went public on, you know, where we think roughly cost per kilogram would be for NdPr. You know, there are a lot of things that since then have changed, namely commodity reagents, but there's also a lot that has, you know, they've stayed the same. And so, you know, this is something that I think, you know, other than, you know, major commodities and inflation, as Michael laid out, with the chemistry working the way that we expect, that is the fundamental driver of the economic framework that we made out to all of you. And so, you know, we don't expect that to change, which is super encouraging.
George Gianarikas (Sustainability Research Analyst)
Great. Thank you. And maybe as a follow-up, last quarter, Jim, you made a statement that you think that at $60 a kilogram, that China Inc is likely unprofitable. Is that still your view? And do you suspect that in and around this price range, we should see some stabilization?
Jim Litinsky (Founder, Chairman, and CEO)
Hey, George. Thanks. Yes, prices, you know, prices in May were roughly around where they are today, so that statement is still true. You know, it's, it's always very difficult to read the tea leaves in China and, you know, if you recall, and I said something like this last quarter, but it's difficult because there's always the ability to sort of shift various things across various entities, you know, as they do in the supply chain or in the stream, if you will. But from everything that we see, that remains the case, and so it is encouraging.
You know, as I said in the prepared remarks, you know, we think that these items are behind, you know, somewhat behind us, so pricing feels more stable here. You know, I would argue that for all the reasons I've stated, that, you know, downside volatility that we saw, there's always, you know, not if but when likelihood that there's that upside volatility the other way, right? It gets reflexive, but, you know, we shall see.
George Gianarikas (Sustainability Research Analyst)
Thanks.
Jim Litinsky (Founder, Chairman, and CEO)
Thanks.
Operator (participant)
Thank you.
Jim Litinsky (Founder, Chairman, and CEO)
Next question.
Operator (participant)
The next question comes from the line of David Deckelbaum with TD Cowen. Please proceed.
David Deckelbaum (Managing Director of Sustainability and Energy Transition)
Thanks for the time, guys. Jim, I'm tempted to ask you about the timeline for getting Daft Punk to work at Mountain Pass. I guess I'll hold off on that one. But, you know, I am curious, as you, as you think about, I thought the idea was in the second quarter that you all would be withholding some inventory or perhaps a greater amount of inventory to be used in the stage two testing. I just wanted to confirm whether that had happened or not, and, you know, if we should still be anticipating that you're effectively still selling a significant amount of concentrate in the back half of this year?
Ryan Corbett (CFO)
Yeah. Hey, David, it's Ryan. I can take that. What I had laid out in the prepared remarks was absolutely a reiteration of that expectation, that, you know, there's a pretty significant amount of inventory that gets consumed into the downstream circuits as we commission. We had talked about roughly two weeks' worth, or let's call it just shy of 2,000 tons of REO. We, as of June 30th, had consumed about a third of that. So it's safe to say that the remainder of that will get consumed as we ramp, you know, and hopefully as quickly as possible. So I would absolutely, you know, expect as you model out Q3 and even Q4, to think about not just the impact of the rest of that inventory getting consumed, as, you know, effectively line fill into the downstream circuits.
In addition, I talked a little bit in the remarks about the sales cycle as we transition to separated products. With that, I just want to reiterate, obviously, the timing there, you know, as we start to consume that REO and concentrate into the downstream circuits, convert it into separated product, and then either sell it on or, you know, bring it to tollers to turn into metal and sell to our ultimate customers. There is also the timing impact of that longer sales cycle, and certainly, as you'd expect, as we ramp our separated product production, and as we sort of continue to fill that channel, particularly the metal production channel, you know, this will get lapped and will be a one-time impact. It is important to think about over the next few quarters the impact that that'll have on the financial model.
David Deckelbaum (Managing Director of Sustainability and Energy Transition)
Yeah, Ryan, that's a nice segue into my follow-up, which is just, just for my own edification. The sales cycle is expected to be six months for getting the NdPr metal, because I guess when you sell concentrate, Shenghe is taking delivery of that cargo at the port, so you can recognize revenue as soon as it leaves port, versus when you're using a tolling arrangement. You don't re-recognize revenue until the product that's still, I guess, technically your resource, until it ends up in the hands of the customer?
Ryan Corbett (CFO)
Sure. It's a good question. I'd say six months is probably not the right answer there. You know, certainly it's significantly longer than, you know, our current sales cycle for concentrate. To clarify the prepared remarks that I think you're keying in on, what we had talked about is separated NdPr production, NdPr oxide production, and shipments that are happening later in this quarter. Later in Q3, likely much of that revenue could be Q1 revenue. You know, end of Q3, beginning of Q1 is not quite six months. Shorter than that for sure. However, longer than exactly what you laid out that our sales cycle is right now, that we deliver product to the port at Long Beach and title transfers there. That's when our revenue recognition happens for concentrate today.
I flag, though, that, you know, not all separated products will be subject to the longer sales cycle. You know, part of our products will remain our products as they get tolled into metal, and then the revenue recognition is, you know, likely at the port in Southeast Asia when it's delivered to customers to be distributed, you know, to broader Asia and to Japan primarily. There will be instances where we sell oxide at the Port of Long Beach as well, and so there really will be a mix. What I mentioned, and I think is important to keep in mind just for the next quarter or two, is that our early NdPr oxide shipments likely will be tolled into metal.
These early shipments, sort of to help you guys think about your models, you know, will likely be subject to that longer sales cycle. You know, as we carry forward and, sort of, you know, start to make more product and broaden the customer base and things like that, there will be a mix.
David Deckelbaum (Managing Director of Sustainability and Energy Transition)
Yep. Thanks for the clarification, Ryan.
Ryan Corbett (CFO)
Sure.
Matt Summerville (Managing Director and Senior Research Analyst)
Thanks. Next question.
Operator (participant)
The next question comes from the line of Lawson Winder with Bank of America. Please proceed.
Lawson Winder (Equity Research Analyst)
Thank you, Operator, and good evening, gentlemen. Nice quarter and great update. I wanted to try and put a bit of a finer point on the ramp-up. Should we still be modeling a run rate of 6,000 tons of NdPr in for full year 2024?
Ryan Corbett (CFO)
I'm happy to start. It's Ryan. Then Michael, if you have anything else to talk about on the commissioning side, feel free to jump in. The what I would say is frankly a reiteration of Michael's commentary that, you know, based on what we've seen, run rate production, you know, at the end of the year remains our goal. It's nonlinear. You know, it's difficult to perfectly forecast but that very much remains our goal. You know, there are certain areas that I'm sure, you know, Michael can better expand on, that will, you know, continue to tweak to improve throughput and all that versus what we're seeing now.
As you think about 2024, though, I'd say it's kind of early to predict exactly what our output and importantly, sales volumes will be for 2024 at this point. You know, we've got a lot of work to do, as I mentioned, in the coming months, to finish commissioning and to ramp production. And so I'd say stay tuned. We'll continue to update you on the progress and, you know, we'll update you on calls going forward. As we always do, we will formulate our 2024 or our next year production and sales plan based on customer demand and on market conditions, you know, once we get closer to that time period.
Lawson Winder (Equity Research Analyst)
You actually, you touched on a really interesting point there, and that is formulating your sales based on marketing market conditions. I mean, one of your competitors made some comments along those lines recently. Is that how you kind of think about the market? I mean, if the market's not willing to take the material, does MP just hold it back?
Ryan Corbett (CFO)
It's a great question. You know, I think the great thing about what we've built here is a platform where we have product flexibility, right? We have the ability to produce stage one products, stage two products. We're making great progress on stage three. You know, we have that as a lever to pull as well. So, you know, we always, as a management team, are focused on, you know, maximizing shareholder value. So if that means, you know, changing a product mix for a period of time, you know, so be it.
Michael Rosenthal (Founder and COO)
To be clear, we have not seen any pushback or any lack of demand. We have lots of conversations and lots of demand, and, you know, the goal now is to thoughtfully build out our sales channel and think about the full downstream of our business.
Lawson Winder (Equity Research Analyst)
Okay. Yeah, that's great color. Then maybe just finally wanted to kind of understand the heavy rare earth separation circuit. Is that gonna ramp up right on the back of this? Like, should we be modeling some costs for that in 2024? Is this something that's gonna happen a little later on, like maybe 2025 or 2026? If it is happening next year, how should we kinda think about that in terms of, like, impact on NdPr?
Michael Rosenthal (Founder and COO)
Yeah. Well, no, by the way, I'm, I'm glad you raised that since you mentioned, you know, one of our peers. I'm guessing you're wondering about heavies. There's probably, just for understanding the overall project, maybe just a little important background for those who don't know. Early in 2022, both us and Lynas were given awards by the Department of Defense. Actually, our award was announced by the President himself. To us, that was exciting. We talked about that. Then there was an announcement of, you know, something with our peer a couple of days ago.
Jim Litinsky (Founder, Chairman, and CEO)
What I would tell you on that is, I think it's, you know, pretty clear that DoD understands the importance of, you know, a level playing field and good competition across the spectrum here. You know, we are fiduciaries, and you can imagine that given how much has changed since early last year in the world, that, you know, we would certainly expect to proceed with projects that we believe are economically attractive and that we believe we have a good competitive position.
I think what I'm trying to get at in being as sort of direct as I can, is that you should expect, if you, if you kind of heard everything I just said, that, you know, we are in discussions, and we believe that we will have, you know, equal support or similar support for our mission with respect to heavies. I think that that's a very positive thing that we recently saw. You know, I think I would leave it at that as far as the heavy project is related, just to say that, again, you can probably deduce from what I'm saying, that I think that, you know, we will continue to expect some good things on that front.
Lastly, I think you asked about timing. You know, the heavies project is to be online for the magnetics business, and, you know, that timing remains on track.
Lawson Winder (Equity Research Analyst)
Thanks so much, guys. Great quarter.
Jim Litinsky (Founder, Chairman, and CEO)
Sure, thanks.
Operator (participant)
Thank you. The next question comes from the line of Laurence Alexander with Jefferies. Please proceed.
Laurence Alexander (Equity Analyst)
Good afternoon. I guess, first of all, could you just give a quick update on your thoughts around CapEx for this year and next year? Just given kind of, you know, the milestone you've hit and kind of the inflationary pressures we're hearing about from other companies.
Ryan Corbett (CFO)
Yeah, sure. Hey, hey, Laurence, it's Ryan. We mentioned earlier on in the call that our original CapEx guidance for the year of $300 million remains intact. You know, we tend not to give CapEx guidance, you know, further out than that. You know, what we had laid out, obviously, a couple of years ago in laying out sort of the broader capital plan across stage two and stage three, was that $700 million investment. That also remains on track. Certainly, as you know, the stage two spend is essentially behind us, you know, except for some, you know, small items from a timing perspective.
So, you know, there are other projects that we're continually investing in, in Mountain Pass, you know, in addition, of course, to our stage three business. So we've done about $130 million year to date in CapEx. You know, we continue to see that $300 million as a, you know, fair number to model for the rest of the year.
Laurence Alexander (Equity Analyst)
Then just to clarify two points you made in the earlier Q&A. With respect to the kind of 6,000 production run rate, given the lag you were talking about in terms of it flowing through the P&L, were, were you trying to get at that the comparable run rate for 2024 would be 75%-80% of that? Then I guess the other issue is, with respect to the prices, the ASPs on stage two, that you will flow through the P&L, can we assume that you'll be able to realize market prices, or will there be some level of discount, either through, due to partnership arrangements or because you're kind of building relationships with customers who you expect to translate into magnet customers.
Can you just give a sense for how closely we should hold you to whatever kind of public market indexes we use for stage two?
Ryan Corbett (CFO)
Sure. Yes, I can take both of those. As it relates to the timing and the sales cycle, you know, I don't think we were trying to make any specific comment as to 2024. I think that, you know, we're actually trying to avoid that since we don't give guidance. What I'd say on that is, you know, if you have an assumption and, you know, our goal has remained to get to run rate production by the end of 2023. We've also tried to consistently flag, of course, that, you know, the overlap from a timing perspective of production and sales that we experience now is not the same, you know, correlation in production and sales that we'll experience once we're producing separated products.
So I think you're on the right track, but certainly if you were modeling 100%, you know, run rate starting 12/31, you would not have 6,000 tons of NdPr sold necessarily, you know, recognized as revenue in 2024. I think that's a fair statement. Remind me your second, second point, second question there?
Laurence Alexander (Equity Analyst)
Just how, how closely should the pricing point you will report today as to time? Yeah.
Ryan Corbett (CFO)
Yep. On pricing, look, we will have a variety of different contract structures, you know, that are, you know, based on the indices that we all look at. You know, I think the thing that will be interesting there as well is, you know, a difference potentially in timing, and then, you know, a variety of different contract structures, as it relates to realized price versus market price. You know, I, I think as we get closer to more significant sales volume, you know, we'll continue to keep you updated there.
There's not gonna be an easy pinpoint for me to be able to give you at this point to say, hey, you know, take market and add or subtract. You know, we'll do our best to keep you updated from a modeling perspective as we get closer.
Laurence Alexander (Equity Analyst)
Just to, I guess, with respect to kind of one other question earlier, just to help us understand the game theory. If you were to decide that you were to produce the rare earth, the NdPr, but then keep it off the market, what's the shelf life of the product? you know, how long could you hold it off the market and still monetize it at the same economics?
Ryan Corbett (CFO)
Mike. Well, just to be clear, we don't have any expectation of keeping product off the market at this time. I don't know. Then, Mike, I don't know if you wanna talk about the-
Laurence Alexander (Equity Analyst)
Yeah.
Michael Rosenthal (Founder and COO)
Yeah, I guess in theoretical terms, I don't believe there should be a shelf life for oxide. A metal or alloy may have considerations of, you know, oxidizing.
Laurence Alexander (Equity Analyst)
Yep. Okay, thanks.
Operator (participant)
Thank you. The next question comes from the line of Abhi Sinha with Northland Capital. Please proceed.
Abhi Sinha (Managing Director of Equity Research)
Yeah, thanks for taking my question. Just quickly on your production facility in Texas, could you confirm if your magnet facility is covered under 48C, and, you know, if you get the IDCs that we can count on?
Ryan Corbett (CFO)
Sure. We had a little trouble hearing you, but I think the question was, was about 48C. Is that right?
Abhi Sinha (Managing Director of Equity Research)
Right. If your magnet facility investment is covered under the 48C.
Ryan Corbett (CFO)
Right. On that point, you know, since we spoke about this last, there have been some further updates and clarifications regarding 48C and how it relates to our stage three business and our DFW facility. You know, I think the important update there was, you know, from Treasury and DOE, that magnetics was specifically called out as a priority. That said, it's definitely too early and, you know, as you can expect for competitive reasons, we're not gonna discuss, you know, specific support we may or may not be seeking from the federal government in a competitive process.
You, you could certainly expect that we're always monitoring these sorts of opportunities and will avail ourselves of any opportunities that arise.
Jim Litinsky (Founder, Chairman, and CEO)
Thank you. I think we can do one more, right?
Laurence Alexander (Equity Analyst)
Sure. Thank you.
Operator (participant)
Absolutely. The final question comes from Carlos De Alba with Morgan Stanley. Please, please proceed.
Carlos De Alba (Research Analyst)
Yeah, I just. Thank you very much. I'll keep it brief. Just wanted to see if you, you have any color on a startup cost. I know, you know, those are normalized out of EBITDA, but just how do you see the progression? They came down quarter-over-quarter. Is this a trend that we should expect to continue or not really?
Michael Rosenthal (Founder and COO)
Carlos, I'm bummed. I thought you were coming back on to congratulate us on our big milestone this quarter. I guess question, so I'll pass it to Ryan.
Ryan Corbett (CFO)
That goes without saying. That goes without saying.
Michael Rosenthal (Founder and COO)
Thank you. Go ahead, Ryan.
Ryan Corbett (CFO)
No, it's a, it's a fair question. I, I'd say the, the reason you probably saw it come down a little bit sequentially, is that, you know, we started to enter into more normalized operations on various circuits as we bring them online in process order. As we've talked about consistently, you know, we've been bringing, each step of the process online, testing it, getting it up to sort of what we would consider commercial operations. Since we had been running some of the most upstream parts of the circuits, you know, for a relatively significant period of time, you know, since we got into to June, you know, part of those costs kind of fell out of the startup category.
I think that, you know, that phenomenon will continue, but, you know, we've rapidly added significantly more circuits, you know, into ongoing operation, you know, very recently. So, you know, by their very nature, sort of startup and non-recurring costs are very difficult to model and predict. I would say a fair way to estimate is, I think our Q2 numbers are probably fair to think about for, you know, Q3 and Q4, then, you know, obviously would tail off very meaningfully.
Michael Rosenthal (Founder and COO)
All right, great. Thank you very much.
Ryan Corbett (CFO)
Thanks, Carlos.
Operator (participant)
Thank you. There are no additional questions left at this time. I will now hand it back to Jim Litinsky. Please proceed.
Jim Litinsky (Founder, Chairman, and CEO)
Hey, thanks. I just wanted to say, this was an exciting milestone for us, and I'm really proud of the team for the hard work and, you know, we'll get back to work over here, and we look forward to talking to you all next quarter. Thanks, everyone.
