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

May 31, 2022

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This talk was recorded LIVE at the All-In Summit in Miami and included slides. To watch on YouTube, check out our All-In Summit playlist:  0:00 Chamath intros MP Materials CEO James Litinsky 1:13 James gives a talk on supply chain, energy...

Transcript

Okay, so I want to introduce somebody uh this is uh an incredible story of a turnaround of a business that impacts a lot of us in America, if you care about climate change et cetera. His name is Jim Lipinski. And uh here's a guy who had all the success in the world. Running a hedge fund successfully, a business called Molycorp goes into bankruptcy. He basically puts his entire fund in, it brings it out of bankruptcy, manages to build one of the first minds that was completely cleared. You heard what Elon said about California in California, that minds some of these rare earths and critical metals that we need to make permanent magnets that we use in electric motors um on the frontlines of climate change building factories now in south Carolina with G. M. Etcetera etcetera. So Jim is just going to walk you through a few things and we're gonna talk about some climate change stuff after

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

It doesn't matter what matters is is that the incremental stuff in the real world has really the way has been led by china. And uh, and, and so when we think about what's now happening in the world, as we electrify what I want to move on to the next one here, um, I think one good thing about going after Ellen is I don't have to really explain this chart. Um, we are electrifying and um, as we electrify what a lot of people might not fully understand is that while all this real stuff has come online, Uh, the Chinese have actually moved downstream very intelligently. And so when we think about a lot of people may have heard of China 2025, But a lot of people probably haven't heard of China 2035, which is the current M. O. Which is to move downstream into standardization. And so actually when we look around the world today, four of the top 10 0. E. M's, our chinese by global battery electric share. And so when we think about the single largest private employer in the country, the auto industry, we think about all these industries that are mineral intensive, the chinese are actually have moved downstream and these are, these are very mineral intensive industries. So what this slide shows is as we go from a fossil fuel world to an electrification world, which, you know we all I think everyone in this room believes is fake complete. Um And this actually excludes steel and aluminum just in the the content of copper, nickel, lithium and then what I focus on rare earths and some of these other things um there's seven times as much content.

And so when we think about the past of the fossil fuel driving geopolitical gamesmanship and power in the world, the future is about minerals and what I focus on are rare earths. And so um we and I'm gonna get to my journey as an accidental industrial in a minute. But but what you can see here is rare earths. Um They're kind of the way to think about it is sort of like a young cousin of semiconductors to the E. V. Business. So regardless of of how electrification happens regardless of battery chemistry how that energy gets to a motor that motor moves via magnets. And so this industry is expected to explode. Yeah. Um And it's not just it's not just TVs, it's you know, wind turbines, drones, robots. Can anyone actually guess where this robot is from? This is uh it's actually from short circuit Johnny # five.

But I'm hoping Ellen will get us a better robot of the future. But when we think about all these industries Magnetics um it's it's really powerful. So um that's where I'm focused and and this is just an example of the commodity needs as we electrify if we take those projections of what's gonna happen in electrification just in my space. So this is N. D. P. R. This is the stuff that we make the input into Magnetics. Um you can see there's a huge deficit that is looming and just moving on, look at my space, here's the challenge. So outside of us, this entire supply chain is essentially domiciled in china and it doesn't even have to be nefarious. But what happens when the largest manufacturers in the world are all competing for what I showed you on that prior slide, a shortage of supply and we've seen lots of headlines whether it's the semiconductor issue um or you know, just today, there was a headline that Rivian is fighting with a supplier over seat costs. You know, all of these things where we're seeing the shortages in the supply chain that are, that are flowing through um if there's an allocation of materials and the materials are controlled um by china or another geopolitical rival, which downstream businesses do we think are going to get those materials.

And this is actually now an existential issue for all of us. Um So back to my story. Um So this is Mountain Pass, this is the mind mentioned that um we bought this at a bankruptcy in my fund. So going back about five years ago this site went bankrupt, it was a public company, it sort of it rose and then it fell. Um, and nobody believed that we could compete against china and in fact I had to, we, we showed up, I showed up in the Delaware courthouse steps. Um, I mean it was literally like out of a movie, there were other creditors pushing to send this thing into bankruptcy. And you know, you look at this thing, you're like, wait, this is the one of the most valuable rare earth materials minds in the world and um, and this is the future, This is a material for electrification and no one wants it, not only does no one want it, but people think that actually we can't even produce here economically because the chinese have taken over the industry. And so we actually kicked in a couple million dollars just to keep it in care maintenance just to keep the eight employees on site going. So that this thing could actually keep its permit through the bankruptcy because otherwise they were just gonna raise it to the ground. So we, we went through that journey. Um, and uh, we ended up buying it. And so these assets, this is about $2 billion dollars of replacement cost.

Not to mention the fact that, um, you know, this is one of the marquee sites in the world and, and um, you know, it's in a stable jurisdiction, all these assets up over here to the left. These are what make it environmentally friendly. So we don't put anything back into the water supply. We have dry tailings, which essentially means that for sure were the cleanest rare operation in the world. If you go onto Youtube, you can kind of see how historically some of that mining and processing is done, but no one wanted it. Um, and everyone thought that, that this couldn't be done, but we, we bought it out of bankruptcy, we took on, it was sort of a, a distress turnaround, uh, and start up at the same time, we had, we had no accounting software. We literally had eight people in a mine and I show up, I'm a hedge fund manager. Um, and uh, you know, people thought I was pretty insane. Um, and probably if I knew what I was getting into, like I said, it was an accident, but I couldn't believe that no one else wanted to do this. And I frankly, I felt as an american, um, somebody had to do this. And you know, there I was on the courthouse steps and so I went for it. Um, and you know, fast forward to today.

And we're now, you know, we're now public. We went as mentioned, went public a couple years ago or $6.5 billion market cap. Um, it's been obviously a massive thank you. Um, so this has been a massive home run for for myself and my investors, but more importantly, I, um, and I don't belittle that ultimately we're capitalist here. We want to do a great job for our for our clients and ourselves. Um, but I hope that we can kind of contextualize this for what needs to happen throughout our economy because I do think that um as painful as the adjustment maybe that we're now in this period that we're about to be in um with with, you know, some of the, as the capital comes out of the growth space, there is going to be a big beautiful bull market in real stuff and it is just beginning and I can give some statistics with the besties. I don't want to ruin my best each time. So I'm gonna finish up real quick. But there there's a lot of stuff that needs to get built and this supply chain stuff is existential. And so what we're doing at M. P. You can see our stage one.

We're doing, we just reported our quarter a couple weeks ago, we're now from a site four years ago that I had to beg on the courthouse steps just to keep it alive. We're now doing Approximately 450 million of run rate Ebitda today. Um, so

you know this.

And then uh we announced the deal, we announced a deal with GM were actually have already broken ground on a magnetic facility in Fort Worth texas. And this is a scale deal. It's not exclusive. We expect to bring in other O. E. M. S. Um where we'll be making magnets, so we'll be shipping material that will be environmentally produced from mountain pass California over to our site and Fort Worth and make Magnetics. And our goal is to build a western Magnetics champion. Um, and so I guess with all of that, I would say, um, hopefully this kind of thing can inspire you. We need the, the good news is there needs to be a lot more stuff like this and maybe I'll share some stats on, you know, some of the other space because I don't want to make this just about rare earths. But when we think about all the materials that we need for this electrification boom and the supply chain that needs to be built, this is like, this is the era of it's as if it's, you know, the 19 teens and ford is just out, I mean there is an entire supply chain and it's not just TVs, it's when turbines, it's drones, it's robots and it needs to be a bunch of real stuff that we all create.

And so, um, I don't think some percentage of us don't need to necessarily debate whether crypto is going to go up or down, you know, now is the time to pivot. I think because this is something that we need to do, um, to, to get competitive again. So I guess with that, all I'll flip the mic and, and uh, feel the fire from the besties. Thank you.

Tesla and their quarterly earnings said something to the effect of, um, you know, we're going to consider becoming a mining company as well. Right. And then I think Elon said something on the earnings call, which I thought was really interesting. He's like, I encourage every entrepreneur out there, uh, to get into lithium please, you know, become a lithium miner. Right. Um, so maybe if you can just quantify for us and you showed the, the gap for your, for NPR but broadly speaking lithium and all the other things that we need to actually electrify and get to a reasonable place in climate change. How behind the curve are we really?

So it's a great question and the data is tough because a lot of it is reliant on battery chemistry and so we don't know exactly how much nickel it'll be, you know, but we do know certainly lithium, nickel, copper, all of these things. It's multiple. So we need, here's actually maybe this is a great stat Uh, some some good source that I utilize estimated that we probably need on the order of 40-50 copper and nickel projects over the next couple of decades. So call it roughly $200 billion dollars of Capex um, to satisfy the demand for electrification that we have over the next couple of decades and what's so interesting you mentioned and obviously I assume Ellen sees this is, if you look at the multiples, you know, just think about it from a strict investor point of view from a financial arbitrage standpoint? Look at the multiples of where Auto, auto ams trade or, you know, certainly Tesla and then look at what's happening in the mining industry today. So, so actually the nickel industry is dominated by essentially Glencore in Vail, those two businesses and I'm not, you know, I'm not pitching stocks. But as an investor, you know, we'll see what the next, those two businesses right now, at today's, uh, commodities prices are essentially gonna free cash flow themselves out in three years and they're buying back stock. Right? And so this is how, how stark the arbitrage is that in the real economy, mining and materials companies, steel companies are trading a double digit free casual yields, they're buying back stock, they have no leverage in their businesses and then downstream, everyone's relying on them and upstream, these guys, they don't want to spend to build out new capacity because the cost of capital is too high. So what's gonna happen is, I think you're gonna see um, maybe an AOL time Warner moment and I don't mean it, the negative way, but I think you could see a Tesla or someone like that by upstream into these industries because ultimately downstream, they all realize that the real stuff is in shortage and you can't have the enterprise value downstream because it's like musical

chairs, how much of your night when you're sleeping, do you think there's an X percent chance, I'm gonna have some huge environmental catastrophe. Like part of I think why a lot of folks, you know, folks like this who could probably go into that business don't is in the back of their mind, they think man this is like this is a lot of gnarly stuff if something goes wrong, how do you manage that risk and how how big is at risk if we try to do this in America.

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

I think most people may or may not know this, but for example, all of the, you know, cobalt that goes into a lot of these E. V. S, a lot of it comes from D. R. C. And if you go and see the state of governance in dRC, women's rights in dRC child rights in dRC, they're not existent. And so it is a very very complicated um dirty supply chain that feeds the beast. And even though you may think you're doing the right thing by, you know, driving this plug in hybrid or you know, your Toyota Prius, if you trace that stuff back, it's a really complicated place and stuff. I think

we've all gotten a big education on supply chain over the last two years with Covid and the value may be of redundancy. And what happens if you give a dictator a little too much power that the Germans are learning a hard lesson about what happens when you shut down nuclear reactors and decide, hey let's buy our let's buy our energy from Putin. Uh that's a

great point you raised about the Germans because I think it's a fair analogy to say that Germany is to not gas as we are to china supply chain. And so we see we see this coming right. We see and again this is this speaks to a geopolitical leverage, this is a national security,

national security issue. It's

a national security? It's a democracy. It's a it's a democracy issue.

Is it a war issue? Is it something that gets to the point where we would have to go to war if for example we didn't get the natural resources and critical elements we need, not that you said that it could not, it would happen. But could it happen where it's so important that all these other countries can electrify and, and well, how

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

like you're talking to GM afford

somebody, probably not

think about it. Do we? If you think about it, do we need to even predict this? We went to a number of wars in the Middle East, over oil. So if this is the new oil and that is the analogy, it's clearly gonna cause, you know, conflicts. And the question is, You know, are we gonna build a strategic reserve of these materials? Do we have a strategic reserve? We, we talked about the food supply problem and Freeburg educated us on, Hey, we've got like 30 days of food. This country has 90 days of food. Do we need to have a strategic reserve of these rare earth minerals in the United States?

Jason. I just don't think there'll be enough because when you think about this is, we're talking about a multi trillions of dollars a year to electrify across the demand is so great, We're talking

about,

we can't build up supply or if we can't, we need to put the capital in and right now and that's why, you know, again, we'll let the, the investor panel maybe they can, can bleed into this. But that's why I think the whole space is a screaming buy because if you look across all of these companies, the cost of capital is just so high. And so one of two things has to happen or both, which is prices just have to go vertical or someone starts taking them out or we're just not going to have the stuff to electrify.

I um, understand

that

there has now been demonstrated significantly more lithium. Tell me if I'm off on this in the oceans than there is in the crust and there may be systems for extracting lithium from the oceans that are electro chemical in nature. Um, that would allow us to kind of access that resource. And what will, you know, obviously if you can get a system that can scale, you can get it all out very quickly. So, I mean, have you looked into these systems have a sense for the opportunity,

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

Adam Jonas, who is the Uh, auto analyst at Morgan Stanley calls this the mother of all Capex cycles, I think. Right. And I think his estimate was like, you know, something like $3 trillion dollars of Capex needs to get spent over the next decade, even to have a fighting chance on all of this stuff. Um, and so if you're looking at new areas, so take your ndp our Mp materials hat off. Um, but if you were in the same position, you were back then now, not, not really, you don't need to go to the courthouse steps, but where would you be looking? You know, would you look at lithium, Would you look at nickel? Would you look at trying to do what you know, china is doing and create better and simpler and cheaper chemistries for batteries? Like where would you spend your time right now, if you weren't doing mp?

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

can you, could you get your mind operational in today's political environment? Do you think, like if you had to start from scratch or if you found a new thing in Nevada or you know, wherever it is?

That's a great question. And that's the challenge is that it takes two to get any of these things. It takes a decade, right? It takes if you have all the capital in place, all the human capital, all just the, you know, going through that process to build it, the materials cost and so, uh, could I do it? I think the world needs it and I think that what we do environmentally is so unique that I think we could get it done. But this is a big challenge. And I think frankly it's a, it's a, you know, you guys were talking in the last session about um we need to come together. This is a big time area where we need to come together. There should be a grand bargain, right? There should be the environmentalists should say, okay, I accept that we need this stuff. I accept that we don't want it to be only made in Russia and china and they should loosen up on some of the permitting stuff. And I think the people who are just like, you know, drill drill, drill mind mind mind, don't care, need to accept that we need to have really tough standards.

Um and I think we should have some kind of grand bargain and it could be, you know, tax policy focused on it. But there needs to be some kind of coming together in our country to recognize that we need this

Damien, Let's be intellectually honest. People are hypocrites, the people in the EU people, the United States, they want the energy they want to achieve. They're complaining about the expense of, you know, even a modest increase in energy across 10%, which they could withstand. They will complain about it and they will not allow fracking in their country, but they're more than willing to let Russia Frankfurt. They don't want the cobalt coming out of the ground in California. They're more than willing to let 15 year olds dig it out of the ground without a mess. Eight year olds as horrific as it is. And there is intellectually dishonest, it's hypocrisy and I think we have to own the fact that we want to live in large houses and we want to blow the air conditioner on some ridiculous settings. America's homes are three times bigger than other

homes to build on this. To two very quick stories, there's a massive deposit of lithium in Nevada which would be enough to basically feed Tesla and another O. E. M. Okay, so this would get probably somewhere between one and 1.5 million cars, Pure Electric on the Road by 2030. And there they were completely permitted um by the BLM, the Bureau of Land Management. And there was a lawsuit that was filed and it's still wrangling its way through the federal court system. And what it is is a claim that the there is an upper wood grouse that could be endangered. Um through this mining, they have yet to find an actual upper wood grouse in the area. But nothing can happen. And so the problem is that we've now delayed two years, you know, it could get resolved this year, but it could be another two or three years, which means the lithium isn't actually available until 21

continues to have

one story. 2nd story is that just yesterday, the California,

the city of

Costa Mesa rejected a bid to build an electrolysis facility To create 100 million liters of clean water every single day. Um, the diesel plant, the diesel plant because they didn't want it

because they're

gonna lose some jellyfish or something.

No, they just didn't want it. They thought it's unsightly. I don't want this in Costa Mesa. Meanwhile, you know, pretty, it's a Costa Mesa. So you know, uh, and, and so to your point when the rubber meets the road, these unfortunate decisions get made and there's no way to, you know, sort of

People want to take 30 minute showers. I mean that's the hypocrisy of it. If Americans really want to talk about concert

First of all, 30 minutes, there's nothing wrong with a 30 minute shower. I

wasn't calling you out specifically, but since you enclose yourself, it's, it's gratuitous. In fact, it's completely,

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

will by the government. You beloved by like, can you kind of like the line and just cut through the nonsense because of Nevada government was like you,

Well, I think I think that it's fair to say that the local officials are very happy with what we've done with what we've achieved and the in Fort Worth texas, the magnetic facility. You know that we have some partnerships with D. O. D. The president announced

those

things in in texas texas texas. Um, so I think that there is frankly support from both sides of the aisle for what we're doing. You know, there were executive orders on the rare earth Magnetics industry, specifically, both in the trump administration and in the biden administration. So I think what we're doing is hopefully nonpartisan. Um, and and frankly, I think all of this should be and that that's, you know, the point about the grand bargain. But even you raised a great point about just all of this stuff. It's, you know, there's so much pushback and we need to we need to figure out a way to get past that because this stuff has to has to get

made. I think it's incredible. I mean, I'm a huge fan. Disclaimer, I was also an

investment. I am not an investment company, but we do appreciate you giving us the education and we do need to be independent from communist countries. Uh, and really have the supply chain situation dialed in. So we appreciate the hard work for America and for freedom.

And I'm a huge fan of you guys. Thank

you. Well, let your winners ride Brain man, David. Oh man, we should all just get a room and just have one big, huge George because they're all just, it's like this like sexual tension,

but they just need to release

somehow.

What your,

what your we need to get

are

I'm going.

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