The finance department managed by MP Materials CFO Otto Schwethelm, by his own definition, is no different from the traditional model. He does not rely on non-GAAP metrics, customer engagement, or other performance measures as many companies do today. However, his company operates in a highly unusual sector.

The company is the only one in the United States engaged in rare earth mining and processing, strategic resources that are critical to modern technology and weapons. Now, as the U.S. is deeply embroiled in a trade war with China, which holds a near-monopoly on rare earth processing, the federal governmentis closely watchingMP Materials, as the company accelerates its capacity expansion to achieve fully independent, end-to-end processing.

MP Materials is the strongest guarantee for the U.S. to secure domestic rare earth supply and safeguard strategic industrial security.

"What we are doing is transitioning from being completely dependent on China for downstream processing to having an alternative," Schwethelm told CFO Dive.

The decline of U.S. capacity

There are 17 rare earth elements globally,including neodymium and praseodymium, collectively known as NdPr. These two elements are the primary building blocks of permanent magnets, which are essential for manufacturing phones, weapons, satellite guidance systems, and other core products in today's economy.

The U.S. once had domestic rare earth mining and processing operations, but over the years, mines and processing plants were sold—often to Chinese companies, which shut down operations and moved them overseas.

MP Operations (the operating entity of MP Materials) has existed in its current form for only about two and a half years. It was restructured from an earlier company that mined rare earths at a large open-pit mine in Mountain Pass, California, about 50 miles from the company's headquarters in Las Vegas. The previous owner invested nearly $2 billion to upgrade processing capacity but went bankrupt before the new processes could be launched.

The private equity investors who acquired the company out of bankruptcy took a distinctly different approach. Instead of extracting cerium (Ce)—a rare earth element mainly used in water treatment—as the previous owner did from the Mountain Pass mine, they focused on extracting NdPr, along with secondary lanthanum (La).

"The new ownership after bankruptcy came in and identified a different component in our ore body, NdPr, as one of the primary products," Schwethelm said.

The use of NdPr in strategic weapons and satellite guidance systems has drawn interest from the federal government, but the government remains a small buyer. The main driver of the NdPr business in the coming years—and what Schwethelm expects to be the company's profit engine—is the growth of electric vehicles and trucks, which rely on permanent magnets.

"The supply and demand curve is primarily driven by EV adoption rates," Schwethelm said. "Obviously, the U.S. is a bit behind on that, but as global regulations are implemented, in China and the EU, they mandate penetration rates of EVs in the total vehicle fleet, which is significant. So the demand curve will quickly outpace the supply capacity of current production."

The company will also have other buyers driving NdPr demand, as wind turbines, drones, and even traditional cars and trucks (to a limited extent) use permanent magnets. But he said the EV market will create what he calls "staggering" demand.

Expanding processing capacity by the end of 2020

Schwethelm's company currently mines ore from Mountain Pass and performs initial processing: grinding the ore and using chemical baths to separate a mixture of rare earth elements called bastnaesite—a semi-separated blend containing NdPr and other elements. But the next stage of processing—fully separating NdPr and lanthanum—remains beyond the company's current capabilities.

However, by the end of next year, the new processing facility that the previous owner invested billions of dollars in is expected to come online, enabling the company to take the next step and process the ore entirely in-house.

"We are reconfiguring and starting up those downstream units (invested in by the previous owner) to further separate the bastnaesite we produce into NdPr and lanthanum," he said.

Even then, China will not be completely out of the supply chain, as most permanent magnet production facilities are located in China.

"Only from the perspective of fully separating the rare earth elements inherent in our ore body do we have end-to-end processing capability," he said. "To convert those raw materials into final magnet products, additional processing is still required. So the gap between separated rare earths and converting them into physical magnets is the largest missing commercial link in the supply chain outside of China."

Schwethelm said Vietnam and Thailand have plants producing permanent magnets, but with limited capacity. Most magnets will still come from China. "Other countries offer alternatives for smaller volumes of NdPr," he said.

Partners provide specialized support

Schwethelm said that once the company enters the market with fully processed NdPr, it will have a competitive advantage over NdPr produced in China. The ore at Mountain Pass is richer in element content than Chinese ore—8% versus 2%—while also posing fewer environmental hazards. Mountain Pass ore has extremely low radiation, partly thanks to the modern processes initiated by the previous owner, whereas ore from China and Australia (the only other countries mining rare earths) is more problematic. (Australia also relies on China for processing.)

"Our radioactivity levels are extremely low, almost nonexistent," he said. "So there is very little uranium and other radioactive materials. If you look at Lynas (the company with the Australian rare earth mine), they left a large amount of radioactive waste in Malaysia (where they previously processed ore), which poses some real problems. We don't have that issue. Much of this is thanks to the previous owner's investment in processing. They closed the water system, so our processing does not harm the environment, either from a processing standpoint or given the low radioactivity of the ore body."

Schwethelm said the company has relied on the expertise of one of its owners, an experienced Chinese mine operator holding about a 10% stake, to help build new processing capacity as efficiently as possible.

"What is the right ore grinding size to maximize the efficiency of flotation and separation chemicals?" he said. "In terms of information sharing, this has been a huge benefit for us, allowing us to leverage their expertise in rare earth separation to ramp up capacity quickly."

The partner has also provided them with a channel to sell ore to Chinese buyers. "They have been involved from the start, as part of the original ownership group after bankruptcy, alongside our two hedge funds," he said.

Market prices are stable

Schwethelm said the tracking and forecasting he does is completely traditional for an extractive enterprise. "Everything revolves around generating free cash flow to support internal growth and asset reinvestment," he said. "It's about revenue and cost per ton, making sound management decisions based on profitability and cash flow."

He said prices per ton do not fluctuate much because their bastnaesite is relatively stable as a commodity. "Looking ahead, it doesn't have the transparency of oil and gas—which is where I spent most of my career—because trading volumes are limited and most of it happens in China," he said. "But as global supply and demand expand, transparency will improve. As EV adoption continues to grow, and from some statistics, whether it's Nissan, Honda, BMW, or Tesla, the number of EV conversions increases, this will increasingly become a component of supply chain and availability, along with growing demand for permanent magnets."

Schwethelm said the 25% tariff China imposed on bastnaesite (as retaliation for U.S. tariffs) has not had a material impact on the company's finances, but removing the tariff would help boost profits.

"Lowering the tariff wouldn't change (the calculations) much," he said. "Objectively, it's just an additional cost that reduces the selling price when the product enters China. As trade relations hopefully improve, this 25% additional cost will disappear, directly translating into our profits."

If tariffs fall before capacity expansion is complete, the company's outlook would be especially bright.

"We see a very strong demand curve that is quickly outstripping anyone's supply capacity, so we are very eager to complete our capital plan as soon as possible to achieve full separation of rare earths," he said.