Rare earths, real impact: Inside the MP Materials deal

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Ben Wilson: Hello, and welcome to ‘What's the Deal?,’ our investment banking series here on J.P. Morgan's Making Sense. I'm your host, Ben Wilson, head of Natural Resources Mergers and Acquisitions at J.P. Morgan. Today, we'll be discussing J.P. Morgan's involvement in the unprecedented series of transactions between the U.S. Department of Defense and MP Materials. Joining me for this insightful discussion is Kevin Colborne, who leads J.P. Morgan's North American Mining franchise, and Andrew Castaldo, co-head of MidCap M&A. Welcome Kevin and Andrew to the podcast.

Kevin Colborne: Thank you, Ben. Excited to be here.

Andrew Castaldo: Yeah. Looking forward to the discussion.

Ben Wilson: Glad you both could join me today. So let's dive right in. So clearly, geopolitical events in the state of the global rare earth supply chain played a key role in this transaction. Kevin, do you mind setting the stage and providing an overview of the constituencies involved?

Kevin Colborne: Sure. So why don't we start out with just the importance of rare earth magnets to our modern economy. As many of you probably know, rare earth magnets are in everything we use for modern applications, from our cell phones to defense applications from F-35s and Tomahawk missiles and beyond. Really the background to this transaction was the fact that post-liberation day, China has weaponized magnets against the U.S., which started breaking down trade negotiations between China and the U.S., and really the only U.S. champion is MP Materials. MP Materials is the only scaled producer of rare earth materials in the U.S. They have a mine and co-located refinery in California, and they have a magnet facility called Independence in Fort Worth, Texas. Really when the trade negotiations started breaking down, it was MP Materials that was approached by the U.S. government, specifically DOD, to work on this transaction as a solution to the U.S. economy, but as well for defense applications.

Ben Wilson: Thanks for that, Kevin. So Andrew, we've got the only integrated American producer and then processor for these rare earth magnets. And Kevin just walked us through the critical national security implications for their use cases. Can you lay out how this deal came together and perhaps the broad construct of the transaction or series of transactions?

Andrew Castaldo: Sure. And look, this is arguably the most unique transaction I've been involved in throughout my career in M&A. But in many respects, it followed a lot of the same steps that are required in any M&A transaction, from diligence, to structuring, to negotiation of the economic terms, to valuation and modeling, all the way to document production and ultimately document negotiation. Very bespoke agreements that were put in place here to memorialize this transaction. But ultimately we got it done through the efforts, and we'll talk a little bit about this later on, the efforts of the company and the administration from beginning to end was a two-and-a-half-month process from the end of April to the announcement in early July.  In terms of what the deal is, ultimately there are three pillars to the arrangement that MP and the administration agreed upon. The first is, and probably the most well-known publicly, the administration investing $400-million into MP in the form of a convertible preferred security. That security combined with some warrants that also were issued to the government entitles the government upon conversion to about 12 or 13% of the pro forma ownership of MP. The second element is what we call a price support agreement. Ultimately the key raw material that goes into rare earth magnets is produced at Mountain Pass. It's called NDPR oxide. That is a compound that historically had been priced above $100 a kilogram as recently as earlier this year was being priced at $60 a kilogram. And the government effectively provided a minimum price guarantee for every kilogram produced by MP of $110. To the extent that the market price or the sales price that MP achieves is below that $110, the government will effectively make MP whole. If the market price exceeds $110, the government will share part of the upside above that $110 minimum guaranteed price. And then the third element of the transaction is a brand new 7,000 tons per annum permanent magnet production facility called 10X. That will cost somewhere between a billion and a billion and a quarter dollars to build. And J.P. Morgan has led a bridge commitment facility of a billion dollars to finance that build out. The government has agreed as part of the transaction to take 100% of the output off that facility as and when it is built and is guaranteeing $140 million of EBITDA for 10 years post completion of the facility. It's also important to note that both the NDPR price protection agreement and the magnet offtake agreement and the commitment that the government is providing are 10-year commitments. So a substantial commitment from the administration in support of a continued build out of the integrated magnet business at MP Materials.

Ben Wilson: Thanks for that, Andrew. So what was most interesting to me is I don't believe that most people listening to this discussion would equate the government with speed. And you talked about a pretty short timeline, which obviously speaks to the urgency of this transaction and the need for these critical earth materials. Kevin, how was MP Materials and the Department of Defense able to pull off this deal on such a tight timeline?

Kevin Colborne: Yeah. So I think, a lot of the credit needs to be given to MP Materials management team, specifically Jim Letinsky, CEO, chairman and co-founder, and Ryan Corbett, who's the CFO. You know, tireless effort on the whole management, MP Materials management team. On the administration side, there was broad alignment on the outcome, obviously shepherded by Deputy Secretary of Defense Steve Feinberg who is extremely focused on this. And given the urgency of this transaction, including the importance to MP Materials, the government, J.P. Morgan really put an all-hands effort into this with a large team from coverage, M&A, leveraged finance, and equity capital markets.

Ben Wilson: Fantastic. So, obviously, a marquee transaction, first of its kind in many ways. Andrew, what are some of the lessons learned or key takeaways for our clients across industries? Are there any industries that you think these lessons are more applicable to than others? What should we be telling people to think about?

Andrew Castaldo: Well, look, I think there's been a lot of speculation, both internally at J.P. Morgan and externally by the press, about other industries that the administration, which has been very vocal about its desire to rework industrial policy in the United States, and what other industries or companies could potentially be appropriate for this type of partnership between the government and industry. So there's a whole slew of different critical minerals that we at J.P. Morgan, and we believe the administration is also focused on, that could potentially be ripe for this type of collaboration. It may not look exactly the same way as MP Materials, for sure, but certainly on the playing field. Pharma is another area. Tech, obviously, whether it be AI-related, whether it be semiconductor-related, we saw that the transaction that was done with Intel, whether it be relating to quantum computing, for sure those are industries that we at J.P. Morgan are thinking about. Obviously, there may be more to be done in the area of rare earths, but we'll see what happens there. We're telling clients who want to approach the government to talk about similar types of transactions is that they shouldn't focus as much on the ultimate solutions, but really laying the groundwork for the government as to what is the problem. And that problem may be something that we see today in supply chains. It could be something that we're foreseeing down the road 10 years. Who is the company and how can the company help solve that problem? What is needed to solve that problem specifically? How much is needed? How much in terms of capital is required to solve that problem? And how quickly? And I think speed is also an important element here. How quickly can the problem be solved? Because this is an administration that wants to get these issues identified and resolved in a relatively short period of time. And so if you approach the government with that type of mindset and with a deck that lays that out, then you set up the stage really to identify what are the potential solutions that are at everyone's disposal. Some of those solutions may be governmental, some may be private enterprise, some may be private finance. I think from J.P. Morgan's perspective, as Kevin alluded to, the one key lesson that we learned here is if you don't have the commercial and the M&A and the financing all talking together in any of these potential partnerships or arrangements, you're probably going to miss something along the way. And knowing how the financing market is thinking about a big build like a magnet plant and how the commercial interrelates to that in terms of offtake and timing is critical to really getting to the optimal outcome here.

Ben Wilson: So Andrew, with that, the obvious question is, what do you think comes next? And how are we thinking about helping our clients think through how to interact with the administration and how to solve some of the issues that are facing America?

Andrew Castaldo: You know, look, it's a huge focus right now. We've convened a task force, Ben, you are co-chair of that task force, which is comprised of investment bankers, commercial bankers, government relations professionals within J.P. Morgan to all tackle really both ends of the spectrum. What is the government thinking and what are our clients thinking? And trying to connect as many dots as we possibly can and advise our clients as to the best way to approach the administration to think about similar types of arrangements. Again, we all recognize they're not going to look exactly like MP, but there are things that the government can do to help, in its mind, really reshape industrial policy. And so, again, we've identified a number of different sectors that we're personally focused on. We've had no less than 100 calls with clients to talk about the MP transaction as well as what this means for other industries. And we've had numerous trips down to Washington to explore those opportunities with the government. So we're very excited about what the next year will bring in terms of additional types of transactions and additional reshaping of industrial policy. And we at J.P. Morgan feel like we're in the middle of a lot of those discussions.

Ben Wilson: Yes. We're certainly answering the call to support our clients, our country, and our allies. So that brings us to the end of today's episode. Thank you, Kevin and Andrew, for sharing your valuable insights and expertise into this deal. Clearly a win for our client, MP Materials, and a win for America. Thank you for tuning in to another episode of ‘What's the Deal?’ We hope you found this conversation insightful. And be sure to tune in to our upcoming episodes as we stay up to speed with the markets. I'm your host, Ben Wilson. Until next time, goodbye.

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This material was prepared by the investment banking group of J.P. Morgan Securities LLC, and not the firm's research department. It is for informational purposes only and is not intended as an offer or solicitation for the purchase, sale, or tender of any financial instrument.

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