# MP Materials Corp. / DE (MP) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from MP Materials Corp. / DE's 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1801368/000180136824000014/mp-20231231.htm
Accession: 0001801368-24-000014
Filing date: 2024-02-28
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/MP/
All MD&A years: /company/MP/mda/
Previous year: /company/MP/mda/fy2022/ (FY 2022)
Next year: /company/MP/mda/fy2024/ (FY 2024)

ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with our Consolidated Financial Statements and related notes appearing elsewhere in this annual report on Form 10-K for the year ended December 31, 2023 (this “Annual Report”). A discussion of changes in our results of operations and cash flows between years ended December 31, 2022 and 2021, has been omitted from this Annual Report, but may be found in “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Comparison of the Years Ended December 31, 2022, 2021, and 2020,” of our annual report on Form 10-K for the year ended December 31, 2022, filed with the U.S. Securities and Exchange Commission on February 28, 2023. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. The actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth under “Item 1A. Risk Factors” and elsewhere in this Annual Report. See also “Cautionary Note Regarding Forward-Looking Statements.”

Executive Overview

MP Materials Corp., including its subsidiaries (“we,” “our,” and “us”), is the largest producer of rare earth materials in the Western Hemisphere. We own and operate the Mountain Pass Rare Earth Mine and Processing Facility (“Mountain Pass”), the only rare earth mining and processing site of scale in North America, and are also constructing a rare earth metal, alloy and magnet manufacturing facility in Fort Worth, Texas (the “Fort Worth Facility”), where we anticipate manufacturing neodymium-iron-boron (“NdFeB”) permanent magnets and its precursor products.

We produce rare earth concentrate products as well as refined rare earth oxides and related products. The rare earth concentrate is principally sold pursuant to the Offtake Agreement to Shenghe (as such terms are defined in Note 20, “Related Party Transactions,” in the notes to the Consolidated Financial Statements), that, in turn, typically sells that product to refiners in China. Following the commissioning of our Stage II optimization project (“Stage II”) in the third quarter of 2023, we began producing separated rare earth products, including neodymium-praseodymium (“NdPr”) oxide, that we began selling to customers globally in the fourth quarter of 2023. Additionally, in April 2022, we entered into a long-term agreement with General Motors Company (NYSE: GM) (“GM”) to supply U.S.-sourced and manufactured rare earth materials and finished magnets for the electric motors in more than a dozen models based on GM’s Ultium Platform. These developments are part of our Stage III downstream expansion strategy (“Stage III”).

Certain rare earth elements (“REE”) serve as critical inputs for the rare earth magnets inside the electric motors and generators powering carbon-reducing technologies such as hybrid and electric vehicles (referred to collectively as “xEVs”) and wind turbines, as well as drones, defense systems, robotics and many other high-growth, advanced technologies. Our integrated operations at Mountain Pass combine low production costs with high environmental standards, thereby restoring American leadership to a critical industry with a strong commitment to sustainability.

Highlights from the year ended December 31, 2023, include:

•Completed construction and/or initial commissioning of all circuits of our Stage II optimization project;

•Commenced production and sales of separated rare earth products in the third quarter and fourth quarter of 2023, respectively;

•Announced “Upstream 60K” strategy targeting an approximately 50% expansion of rare earth oxide (“REO”) in concentrate output at Mountain Pass within four years with modest incremental investment;

•Maintained strong concentrate production volumes despite continued construction and commissioning activities;

•Completed construction of the building for the Fort Worth Facility, opened the office space that will serve as our company-wide magnetics headquarters, and made further progress on advancing our metal and magnet-making production capabilities;

•Advanced the engineering and design and began procuring equipment for our heavy rare earth elements (“HREE”) processing and separations facility at Mountain Pass (the “HREE Facility”);

•Entered into a tolling agreement with and subsequently acquired a 49% equity interest in VREX Holdco (as defined in the “Recent Developments” section below);

•Maintained a strong balance sheet with cash, cash equivalents and short-term investments totaling $997.8 million as of December 31, 2023, despite significant capital expenditures to support Stage II, the Fort Worth Facility, and the HREE Facility;

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•Generated revenue of $253.4 million, net income of $24.3 million, and diluted earnings per share (“EPS”) of $0.14;

•Generated Adjusted EBITDA (see below) of $102.5 million, Adjusted Net Income (see below) of $71.4 million, and Adjusted Diluted EPS (see below) of $0.39; and

•Generated net cash provided by operating activities of $62.7 million.

Our results of operations for the year ended December 31, 2023, demonstrate solid operational execution against a weak pricing backdrop. Our Stage I concentrate operations continue to deliver strong production levels despite significant work on completing construction and commissioning of Stage II circuits as well as advancing the HREE Facility at Mountain Pass. Upon initial commissioning of the Stage II circuits, we commenced production of separated rare earth products in the third quarter of 2023. Also in the third quarter of 2023, we began shipments of NdPr oxide to tollers for processing into NdPr metal. Furthermore, we began selling separated rare earth products in the fourth quarter of 2023, beginning with NdPr oxide. While we made significant progress on scaling production of separated rare earth products in the fourth quarter of 2023, we expect that it may take several quarters to achieve our designed throughput of separated products.

In addition, our Stage III magnetics team continued to make significant progress on our strategy to re-establish magnet manufacturing in the U.S., including completing building construction and moving into the office portion of the Fort Worth Facility, and installing our first major pieces of process and magnet prototype production equipment, while advancing the organization’s engineering and manufacturing technology capabilities.

We consider net income and diluted EPS to be the most directly comparable financial measures calculated in accordance with generally accepted accounting principles in the U.S. (“GAAP”) to Adjusted EBITDA, Adjusted Net Income, and Adjusted Diluted EPS, which are non-GAAP financial measures. Refer to the “Non-GAAP Financial Measures” section below for the definitions of Adjusted EBITDA, Adjusted Net Income, and Adjusted Diluted EPS, as well as a reconciliation of net income to Adjusted EBITDA and Adjusted Net Income, and Diluted EPS to Adjusted Diluted EPS.

Recent Developments

Distribution Agreement with Sumitomo

In February 2023, we entered into a distribution agreement (the “Distribution Agreement”) with Sumitomo Corporation of Americas (“Sumitomo”), under which Sumitomo serves as the exclusive distributor of NdPr oxide and NdPr metal, produced by us, to Japanese customers. Further, in connection with the Distribution Agreement, we intend to collaborate with Sumitomo on other business opportunities related to rare earth processing and downstream products. Under the terms of the Distribution Agreement, Sumitomo will be paid a variable commission. The initial term of the Distribution Agreement is through the end of 2025 with options to renew annually.

Patent and Intellectual Property License

In August 2023, we acquired a license to use patented technology, technical know-how, and other intellectual property pertaining to the development and manufacturing of magnetic products in exchange for 435,729 shares of our common stock. Contemporaneous with the acquisition of the license, we entered into a long-term consulting agreement in support of integrating the licensed technology and know-how into our existing processes aimed at the development of magnetic products.

Tolling Agreement with and Investment in VREX Holdco

In October 2023, we entered into a tolling agreement with VREX Holdco Pte. Ltd. (“VREX Holdco”) (the “Tolling Agreement”), a subsidiary of Shenghe. VREX Holdco owns Vietnam Rare Earth Company Limited (“VREX”), which owns and operates a metal processing plant and related facilities in Vietnam. Pursuant to the Tolling Agreement, we deliver NdPr oxide to VREX Holdco, which VREX Holdco then causes VREX to process into NdPr metal for delivery to our customers globally. As several of our potential customers that manufacture magnets outside of China prefer to purchase NdPr metal in addition to NdPr oxide, this Tolling Agreement will enable us to distribute NdPr products more widely to customers in Japan and other global markets. During the term of the Tolling Agreement, we will pay VREX Holdco a processing fee per unit of rare earth metal produced. We maintain title to the products and directly enter into sales agreements for the produced NdPr metal. The initial term of the Tolling Agreement is three years and may be renewed for additional three-year terms.

In December 2023, we invested $9.7 million of cash in exchange for a 49% equity interest in VREX Holdco. Refer to Note 6, “Equity Method Investment,” in the notes to the Consolidated Financial Statements for additional information.

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New Offtake Agreement

In January 2024, we entered into a new offtake agreement with Shenghe (the “New Offtake Agreement”) that replaced and extended the Offtake Agreement. The initial term of the New Offtake Agreement is two years, with the option for us to extend the term for an additional one-year period. The terms of the New Offtake Agreement are substantially the same as those of the Offtake Agreement with the exception of the addition of NdPr metal into the definition of non-concentrate rare earth products. See Note 20, “Related-Party Transactions,” in the notes to the Consolidated Financial Statements for a discussion of the Offtake Agreement, including its terms.

Key Performance Indicators

We have historically used and/or currently use the following key performance indicators (“KPIs”) to evaluate the performance of our business. However, as our business continues to evolve and transitions from production of rare earth concentrate to production of separated rare earth products, the metrics that management uses to evaluate the business may continue to change or be revised. For example, beginning with the first quarter of 2024, we will no longer present Production Cost per REO MT, which is a metric focused solely on Stage I concentrate operations, as it will no longer be meaningful in evaluating and understanding our business or operating results. In addition, during 2023, upon the production of separated products, we identified three new KPIs of our business: NdPr Production Volume, NdPr Sales Volume and NdPr Realized Price per KG. Our calculations of these KPIs may differ from similar measures published by other companies in our industry or in other industries. The following table presents our KPIs:

[[GREPCENT_TABLE]]
[["","Year ended December 31,","","Amount Change","","% Change"],["(in whole units or dollars, except percentages)","2023","","2022","","2021","","2023 vs. 2022","","2022 vs. 2021","","2023 vs. 2022","","2022 vs. 2021"],["Rare earth concentrate"],["REO Production Volume (MTs)","41,557","","","42,499","","","42,413","","","(942)","","","86","","","(2)","%","","\u2014","%"],["REO Sales Volume (MTs)","36,837","","","43,198","","","42,158","","","(6,361)","","","1,040","","","(15)","%","","2","%"],["Realized Price per REO MT","$","6,854","","","$","11,974","","","$","7,745","","","$","(5,120)","","","$","4,229","","","(43)","%","","55","%"],["Production Cost per REO MT","$","2,058","","","$","1,728","","","$","1,493","","","$","330","","","$","235","","","19","%","","16","%"],["Separated NdPr products"],["NdPr Production Volume (MTs)","200","","","N/A","","N/A","","N/A","","N/A","","N/A","","N/A"],["NdPr Sales Volume (MTs)","10","","","N/A","","N/A","","N/A","","N/A","","N/A","","N/A"],["NdPr Realized Price per KG","$","70","","","N/A","","N/A","","N/A","","N/A","","N/A","","N/A"],["N/A = Not applicable as there was neither NdPr production nor sales volume in these periods."]]
[[/GREPCENT_TABLE]]

REO Production Volume

We measure our REO-equivalent production volume for a given period in metric tons (“MTs”), our principal unit of sale for our concentrate product. This measure refers to the REO content contained in the rare earth concentrate we produce and, beginning in the second quarter of 2023, includes volumes fed into downstream circuits for commissioning and starting up our separations facilities and for producing separated NdPr product, the latter of which is also included in our KPI, NdPr Production Volume. Our REO Production Volume is a key indicator of our mining and processing capacity and efficiency.

The rare earth concentrate is a processed, concentrated form of our mined rare earth-bearing ores. While our unit of production and sale is a MT of contained REO, the actual weight of our rare earth concentrate is significantly greater, as the concentrate also contains non-REO minerals, loss-on-ignition, and residual moisture from the production process. We target REO content of greater than 60% per dry MT of concentrate (referred to as “REO grade”). The elemental distribution of REO in our concentrate is relatively consistent over time and production lot. We consider this the natural distribution, as it reflects the distribution of elements contained, on average, in our ore.

REO Sales Volume

Our REO Sales Volume for a given period is calculated in MTs. A unit, or MT, is considered sold once we recognize revenue on its sale as determined in accordance with GAAP. Our REO Sales Volume is a key measure of our ability to convert our concentrate production into revenue. Our REO Sales Volume for the year ended December 31, 2023, included both traditional concentrate as well as roasted concentrate.

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Realized Price per REO MT

We calculate the Realized Price per REO MT for a given period as the quotient of: (i) our rare earth concentrate sales, which are determined in accordance with GAAP, for a given period and (ii) our REO Sales Volume for the same period. Realized Price per REO MT is an important measure of the market price of our concentrate product. For the year ended December 31, 2021, we adjusted our rare earth concentrate sales for the revenue impact of tariff rebates related to prior period sales, resulting in the use of a non-GAAP financial measure, Total Value Realized. See the “Non-GAAP Financial Measures” section below for a reconciliation of our Total Value Realized, which is a non-GAAP financial measure, to our rare earth concentrate sales, which is determined in accordance with GAAP.

Production Cost per REO MT

We calculate the Production Cost per REO MT for a given period as the quotient of: (i) our Production Costs (see below) for a given period and (ii) our REO Sales Volume for the same period. We define Production Costs, which is a non-GAAP financial measure, as our cost of sales (excluding depletion, depreciation and amortization) (“COS”) less stock-based compensation expense included in COS, shipping and freight costs, and costs not attributable to concentrate sales.

Production Cost per REO MT is a key indicator of our concentrate production efficiency. As a significant portion of our cash costs of Stage I production are fixed, our Production Cost per REO MT is influenced by mineral recovery, REO grade, plant feed rate and production uptime. See the “Non-GAAP Financial Measures” section below for a reconciliation of our Production Costs, which is a non-GAAP financial measure, to our COS, which is determined in accordance with GAAP, as well as the calculation of Production Cost per REO MT.

NdPr Production Volume

We measure our NdPr Production Volume for a given period in MTs, our principal unit of sale for our NdPr separated products. NdPr Production Volume refers to the volume of finished and packaged NdPr oxide produced at Mountain Pass for a given period. NdPr Production Volume is a key indicator of our separating and finishing capacity and efficiency.

NdPr Sales Volume

Our NdPr Sales Volume for a given period is calculated in MTs and on an NdPr oxide-equivalent basis (see example below). A unit, or MT, is considered sold once we recognize revenue on its sale, whether sold as NdPr oxide or NdPr metal, as determined in accordance with GAAP. For NdPr metal sales, the MTs sold and included in NdPr Sales Volume are calculated on the basis of the volume of NdPr oxide used to produce such NdPr metal. For example, assuming a material conversion ratio of 1.25, a sale of 100 MTs of NdPr metal would be included in this KPI as 125 MTs of NdPr oxide-equivalent. NdPr Sales Volume is a key measure of our ability to convert our production of separated NdPr products into revenue.

We expect to have a mix of contracts with customers where we will sell NdPr as (i) oxide, (ii) metal, where the amount of oxide required to produce such metal is variable, and (iii) metal, where we have a guarantee of the amount produced and sold based on the amount of oxide consumed. Among other factors, differences between quarterly NdPr Production Volume and NdPr Sales Volume may be caused by the time required for the conversion of NdPr oxide to NdPr metal, including time in-transit.

NdPr Realized Price per KG

We calculate the NdPr Realized Price per kilogram (“KG”) for a given period as the quotient of: (i) our NdPr oxide and metal sales, which are determined in accordance with GAAP, for a given period and (ii) our NdPr Sales Volume for the same period. NdPr Realized Price per KG is an important measure of the market price of our NdPr products.

Factors Affecting Our Performance

We believe we are uniquely positioned to capitalize on the key trends of electrification and supply chain security, particularly as domestic EV production grows. Our continued success depends to a significant extent on our ability to take advantage of the following opportunities and meet the challenges associated with them.

Demand for REE

The key demand drivers for REE are a diverse array of growing end markets, including: electric mobility (e.g., traction motors in passenger and commercial xEVs, etc.); renewable power generation (e.g., wind power generators); energy-efficient motors, pumps, and compressors (e.g., heating, ventilation and air conditioning (“HVAC”) systems, elevators, escalators, etc.);

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industrial and service robotics (e.g., motors, actuators, brakes and sensors used in industrial and service robots); consumer and medical applications (e.g., smart phones and other mobile devices, computing devices, speakers and microphones, fiber optics, laser crystals, x-ray equipment, etc.); critical defense systems (e.g., guidance and control systems, avionics, global positioning systems, radar and sonar, drones, etc.); and catalysts and phosphors (e.g., vehicle emissions reduction, fuel refining, energy-efficient lighting, etc.). Accordingly, the demand for our products may be impacted by demand for these downstream products, particularly the continued growth in xEVs.

Despite the current macroeconomic conditions, we continue to believe we benefit from the growth of the rare earth market, particularly the market for NdPr and permanent magnets, and from several demand tailwinds for REE. These include the trend toward electrification; geographic supply chain diversification, particularly in relation to China; the U.S. government initiatives to restore domestic supply of critical minerals; and the increasing acceptance of environmental, social and governance mandates.

However, changes in technology could also drive down the use of REE, including NdPr, in the components in which they are now used, or lead to a decline in reliance on such components altogether. Actual, or perceived, decreases in demand for REE, whether through changes in technology or slower growth in the end markets that utilize REE, could result in a decline in the market price of REE, including NdPr, and/or result in pricing volatility. We also operate in a competitive industry, and many of our key competitors are based in China, where competitors may not be subject to the same rigorous environmental standards and production costs are typically lower than in the U.S.

Maximizing Production Efficiency

Since the implementation of our Stage I optimization plan and the achievement of commercial production of concentrate on July 1, 2019, our quarterly REO Production Volume has exceeded 8,500 MTs, and we have achieved at least 40,000 MTs of annual REO Production Volume since 2021. These results were achieved by optimizing the reagent scheme, reducing process temperatures, improving tailings facility management, and committing to operational excellence, which has allowed us to achieve approximately 92% uptime in 2023. Our Stage I optimization plan enabled us to achieve what we believe to be world-class production cost levels for rare earth concentrate.

In November 2023, we announced our “Upstream 60K” strategy whereby we intend to grow our annual REO Production Volume to approximately 60,000 MTs by expanding upstream capacity via investments in further beneficiation, including the ability to process alternative feedstocks and upgrade lower-grade feedstocks. We aim to achieve this initiative within the next four years with modest incremental capital investment.

The success of our business reflects our ability to continue to manage our costs. Our production achievements in Stage I have provided economies of scale to lower production costs per MT of REO produced in concentrate. Furthermore, we designed our Stage II process flow to capitalize on the inherent advantages of the bastnaesite ore at Mountain Pass, that is well-suited to low-cost refining by selectively eliminating the need to carry cerium, a lower-value mineral, through the separations process. Additionally, our location offers transportation advantages that create meaningful cost efficiencies in securing incoming supplies and shipping of our final products.

We currently operate a single site in a single location, and any stoppage in activity, including for reasons outside of our control, could adversely impact our production, results of operations and cash flows. In addition, several of our current and potential competitors are government supported and may have access to substantially more capital, which may allow them to make similar or greater efficiency improvements or undercut market prices for our product.

Development of Our REE Refining and Downstream Manufacturing Capabilities

Stage II advanced our operations from the production of rare earth concentrate to the separation of individual REE. The project incorporated upgrades and enhancements to the prior facility process flow intended to reliably produce separated REE at a low cost while minimizing our impact on the environment. More specifically, we have reintroduced an oxidizing roasting circuit, reoriented portions of the plant process flow, increased product finishing capacity, improved wastewater management, and made other improvements to materials handling and storage. The reintroduction of the oxidizing roasting circuit allows subsequent stages of the production process to occur at lower temperatures, and with lower volumes of materials and reagents, which supports lower operating and maintenance costs and higher uptime than would otherwise be achievable.

During the third quarter of 2023, we began producing separated rare earth products. However, we expect that it may take several quarters to achieve our designed throughput of separated products. As we increase production of separated products over time, we expect to improve our per-unit production costs of NdPr oxide, which represents a majority of the value contained in our concentrate.

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Partially supported by a $35.0 million award from the Department of Defense’s Office of Industrial Base Policy, Industrial Base Analysis and Sustainment program, we are currently advancing the facilitating works, engineering and procurement on the HREE Facility, which will be built at Mountain Pass and will be integrated into the rest of our Stage I and Stage II facilities. The HREE Facility is expected to support the separating of HREE contained in the Mountain Pass ore as well as from third-party feedstocks.

In addition, we are constructing the Fort Worth Facility and developing engineering and manufacturing technology to process NdPr oxide into metal and magnets, while incorporating magnet recycling capabilities. These initiatives support our long-term plans to become a leading global source for rare earth magnets. We believe integration into magnet production will provide some protection from commodity pricing volatility, while also enhancing our business profile as the producer of a critical industrial output in addition to a producer of resources. We expect our Stage III efforts to continue to benefit from geopolitical developments, including initiatives to repatriate critical materials supply chains.

Our Mineral Reserves

Our ore body has proven over more than 60 years of operations to be one of the world’s largest and highest-grade rare earth resources. As of December 31, 2023, SRK Consulting (U.S.), Inc., an independent consulting firm that we retained to assess our reserves, estimated total proven and probable reserves of 1.86 million short tons of REO contained in 28.46 million short tons of ore at Mountain Pass, with an average ore grade of 6.20%. These estimates use an estimated economical cut-off grade of 2.43% total rare earth oxide. Based on these estimated reserves and our expected annual production rate of REO upon production ramp-up of Stage II, our expected mine life was approximately 33 years as of December 31, 2023. Over time, we expect to be able to continue to grow our expected mine life through additional exploratory drilling and improved processing capabilities, which may result in changes to various assumptions underlying our mineral reserve estimate.

Mining activities in the U.S. are heavily regulated, particularly in California. Regulatory changes may make it more challenging for us to access our reserves. In addition, new mineral deposits may be discovered elsewhere, which could make our operations less competitive.

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Results of Operations

Comparison of the Years Ended December 31, 2023, 2022, and 2021

The following table summarizes our results of operations:

[[GREPCENT_TABLE]]
[["","For the year ended December 31,","","Amount Change","","% Change"],["(in thousands, except percentages)","2023","","2022","","2021","","2023 vs. 2022","","2022 vs. 2021","","2023 vs. 2022","","2022 vs. 2021"],["Revenue:"],["Rare earth concentrate","$","252,468","","","$","517,267","","","$","328,563","","","$","(264,799)","","","$","188,704","","","(51)","%","","57","%"],["NdPr oxide and metal","695","","","\u2014","","","\u2014","","","695","","","\u2014","","","N/M","","N/M"],["Other rare earth products","282","","","10,243","","","3,389","","","(9,961)","","","6,854","","","(97)","%","","202","%"],["Total revenue","253,445","","","527,510","","","331,952","","","(274,065)","","","195,558","","","(52)","%","","59","%"],["Operating costs and expenses:"],["Cost of sales(1)","92,714","","","92,218","","","76,253","","","496","","","15,965","","","1","%","","21","%"],["Selling, general and administrative","79,245","","","75,857","","","56,646","","","3,388","","","19,211","","","4","%","","34","%"],["Depreciation, depletion and amortization","55,709","","","18,356","","","24,382","","","37,353","","","(6,026)","","","203","%","","(25)","%"],["Start-up costs","21,330","","","7,551","","","378","","","13,779","","","7,173","","","182","%","","N/M"],["Advanced projects and development","14,932","","","4,249","","","4,195","","","10,683","","","54","","","251","%","","1","%"],["Other operating costs and expenses","7,234","","","1,868","","","4,753","","","5,366","","","(2,885)","","","287","%","","(61)","%"],["Total operating costs and expenses","271,164","","","200,099","","","166,607","","","71,065","","","33,492","","","36","%","","20","%"],["Operating income (loss)","(17,719)","","","327,411","","","165,345","","","(345,130)","","","162,066","","","(105)","%","","98","%"],["Interest expense, net","(5,254)","","","(5,786)","","","(8,904)","","","532","","","3,118","","","(9)","%","","(35)","%"],["Other income, net","56,048","","","19,527","","","3,754","","","36,521","","","15,773","","","187","%","","420","%"],["Income before income taxes","33,075","","","341,152","","","160,195","","","(308,077)","","","180,957","","","(90)","%","","113","%"],["Income tax expense","(8,768)","","","(52,148)","","","(25,158)","","","43,380","","","(26,990)","","","(83)","%","","107","%"],["Net income","$","24,307","","","$","289,004","","","$","135,037","","","$","(264,697)","","","$","153,967","","","(92)","%","","114","%"],["Adjusted EBITDA(2)","$","102,502","","","$","388,631","","","$","219,077","","","$","(286,129)","","","$","169,554","","","(74)","%","","77","%"],["Adjusted Net Income(2)","$","71,378","","","$","320,557","","","$","154,187","","","$","(249,179)","","","$","166,370","","","(78)","%","","108","%"],["Free Cash Flow(2)","$","(196,398)","","","$","22,049","","","$","(17,517)","","","$","(218,447)","","","$","39,566","","","N/M","","N/M"]]
[[/GREPCENT_TABLE]]

N/M = Not meaningful.

(1)Excludes depreciation, depletion and amortization.

(2)Non-GAAP financial measures are defined and reconciled to the most directly comparable GAAP financial measures in the “Non-GAAP Financial Measures” section below.

Rare earth concentrate revenue consists primarily of sales of traditional and roasted rare earth concentrate. The sales price of rare earth concentrate sold to Shenghe under both agreements is based on an agreed-upon price per MT, with an adjustment for the ultimate market price of the product realized by Shenghe upon sales to their customers, including the impact of changes in the exchange rate between the Chinese Yuan and the U.S. dollar.

The decrease in rare earth concentrate revenue for the year ended December 31, 2023, as compared to the prior year, was driven by lower Realized Price per REO MT, which decreased by 43% when compared to the prior year, as well as lower REO Sales Volume, which decreased by 15% when compared to the prior year.

Realized Price per REO MT for the year ended December 31, 2023, reflects a significantly softer pricing environment for rare earth products, as compared to the prior year when pricing peaked in February 2022. As noted above in the “Factors Affecting our Performance” section, market prices for rare earth products may be volatile due to actual or perceived changes in supply or demand. The decline in the market prices for rare earth products in 2023 was largely attributable to lower than anticipated growth in demand for magnetic products, which negatively impacted the price of REE. The decrease in REO Sales Volume for the year ended December 31, 2023, was due to the start-up of Stage II operations. A significant portion of the REO produced, which could otherwise have been sold as rare earth concentrate, was used to charge the Stage II circuits, establish separations work-in-process inventory, or produce packaged and finished separated rare earth products, the majority of which have not yet been sold.

Historically, our REO Sales Volume had generally tracked our REO Production Volume over time with slight period-to-period differences caused by the timing of shipments. However, as we continue to ramp up production of separated rare earth

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materials, we expect that significant volumes of REO produced from Stage I operations will be retained for separation and not sold as concentrate. In addition, a significant portion of the contained cerium in the REO produced will be intentionally rejected and may not result in finished product. Accordingly, as evidenced in the third and fourth quarters of 2023 (see the “Quarterly Performance Trend” section below), we expect that REO Sales Volume will be significantly lower than REO Production Volume in the future as we produce and sell more separated products.

NdPr oxide and metal revenue consists of sales of NdPr oxide under individual sales agreements, which commenced in the fourth quarter of 2023. As we ramp up production of separated rare earth products, we expect our NdPr oxide and metal revenue to become a larger portion of our total revenue. Accordingly, to the extent we are able to sell a greater portion of NdPr oxide and NdPr metal, we expect that rare earth concentrate revenue will decline in future periods.

Other rare earth products revenue for the year ended December 31, 2023, decreased as compared to the prior year, primarily driven by $8.5 million of revenue related to a sales agreement with Shenghe entered into in March 2022 for certain stockpiles of rare earth fluoride (“REF”).

Cost of sales (excluding depreciation, depletion and amortization) consists of production- and processing-related labor costs (including wages and salaries, benefits, bonuses, and stock-based compensation), mining and processing supplies (such as reagents), parts and labor for the maintenance of our mining fleet and processing facilities, other facilities-related costs (such as property taxes and utilities), packaging materials, and shipping and freight costs.

COS for the year ended December 31, 2023, remained relatively flat year over year, primarily due to an increase in Production Cost per REO MT of $330 or 19%, offset by a decrease in REO Sales Volume and $5.5 million in lower shipping and freight costs, which are included in COS but excluded from Production Cost per REO MT. The increase in Production Cost per REO MT was driven by higher payroll costs, including the increase in employee headcount to support the expansion of operations, and to a lesser extent, higher materials and supplies costs as well as higher property and other taxes. Shipping and freight costs decreased due to reductions in trucking rates and diesel fuel prices, as well as lower sales volume. In addition, COS for the year ended December 31, 2023, included a $2.3 million write-down on certain of our inventories (refer to Note 4, “Inventories,” in the notes to the Consolidated Financial Statements for more information). Production Cost per REO MT varies period to period based on the timing of scheduled outages of our production facilities for maintenance. See the “Quarterly Performance Trend” section below.

With the commissioning of Stage II in 2023, the expected headcount growth to support our refining operations is largely complete as of December 31, 2023. Therefore, we do not anticipate payroll cost growth to be as significant in future periods, although year-over-year comparisons may still be impacted given the timing of hiring in 2023. In addition, as noted below, given the commencement of initial production of separated products in late 2023, we expect certain salaries and wages of employees previously involved in start-up activities will no longer be considered start-up costs in 2024 as commercial production ramps. Instead, such costs will primarily be included in COS to the extent such costs are not absorbed into inventories. Lastly, we expect other operating costs associated with our Stage II operations, particularly chemical reagents, maintenance expenses, and consumables, which have a significant variable component, to grow in line with production in future periods.

Selling, general and administrative (“SG&A”) expenses consist primarily of personnel costs (including salaries, benefits, bonuses, and stock-based compensation) of our administrative functions such as executives, accounting and finance, legal, and information technology; professional services (including legal, regulatory, audit and others); certain engineering expenses; insurance, license and permit costs; corporate office lease cost; office supplies; and certain environmental, health and safety expenses.

SG&A expenses for the year ended December 31, 2023, increased by $3.4 million, or 4%, as compared to prior year, driven primarily by $5.4 million in higher personnel costs (excluding stock-based compensation expense), along with other general and administrative costs required to further build out our corporate infrastructure in support of our downstream expansion. Additionally, with the commencement of the lease for corporate office space in April 2023, we recognized $0.9 million in higher building rent expense compared to the prior year and are expected to incur higher rent expense going forward, when compared to prior year periods. The increase in SG&A was partially offset by $8.0 million in lower stock-based compensation expense due primarily to the timing of grants and the recognition of stock-based compensation on an accelerated basis for virtually all of our stock awards.

Depreciation, depletion and amortization primarily consists of depreciation of property, plant and equipment and depletion of mineral rights. The year-over-year increase in depreciation, depletion and amortization for the year ended December 31, 2023, primarily reflects an increase in depreciation of $38.2 million, resulting from the continued placement of

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new circuits and facilities associated with our Stage II optimization project into service, which began at the end of the fourth quarter of 2022.

Start-up costs relate to costs associated with restarting an existing facility or commissioning a new facility, circuit or process of our production, manufacturing, or separations facilities prior to the achievement of commercial production, that do not qualify for capitalization. Such costs, which are expensed as incurred, include certain salaries and wages, outside services, parts, training, and utilities, among other items, used or consumed directly in these start-up activities.

Start-up costs for the year ended December 31, 2023, increased by $13.8 million year over year, of which $12.8 million was associated with our Stage II optimization project and the remaining $1.0 million was associated with our Stage III initiatives. Given the commencement of initial production of separated products in late 2023, we expect start-up costs associated with Stage II will decrease meaningfully in 2024 as commercial production ramps, specifically since salaries and wages of certain employees will no longer be considered start-up, and instead will primarily be included in COS to the extent such costs are not absorbed into inventories. In addition, we currently expect start-up costs pertaining to our Stage III initiatives will increase in 2024 as we advance in starting up and developing our magnetics capability.

Advanced projects and development consists principally of costs incurred in connection with research and development of new processes or to significantly enhance our existing processes, and certain government contracts, as well as costs incurred to support growth initiatives or pursue other opportunities. Advanced projects and development for the year ended December 31, 2023, increased year over year primarily due to costs incurred for legal, consulting, and advisory services to support growth initiatives, such as potential acquisitions, mergers, or other investments, which increased by $9.0 million, and continued investment in research and development activities, which increased by $1.5 million and related primarily to Stage III magnetics.

Other operating costs and expenses consists primarily of accretion of asset retirement and environmental obligations; gains or losses on disposals of long-lived assets, including demolition costs; and write-downs of legacy stockpile inventories. Other operating costs and expenses for the year ended December 31, 2023, increased by $5.4 million year over year as a result of $5.5 million in demolition costs associated with demolishing and removing certain out-of-use older facilities and infrastructure from the Mountain Pass site to accommodate future expansion in rare earth processing.

Interest expense, net principally consists of the expense associated with the 0.25% per annum interest rate and the amortization of the debt issuance costs on our Convertible Notes (as defined in the “Liquidity and Capital Resources” section below) and the amortization of the discount on a prior debt obligation to Shenghe, offset by capitalized interest. Interest expense, net for the year ended December 31, 2023, decreased year over year due to the full repayment of a debt obligation to Shenghe in the first quarter of 2022.

Other income, net consists of interest and investment income and non-operating gains or losses. Other income, net for the year ended December 31, 2023, increased year over year as a result of interest and investment income earned on our short-term investments, which were purchased starting in the second quarter of 2022. Interest and investment income is principally generated from accretion of the discount on such investments.

Income tax expense consists of an estimate of U.S. federal and state income taxes in the jurisdictions in which we conduct business, adjusted for federal, state and local allowable income tax benefits, the effect of permanent differences and any valuation allowance against deferred tax assets. The effective tax rate (income tax expense as a percentage of income before income taxes) was 26.5%, 15.3% and 15.7% for the years ended December 31, 2023, 2022 and 2021, respectively. The effective tax rate for the year ended December 31, 2023, differed from the statutory tax rate of 21% primarily due to a deduction limitation on officers’ compensation and a valuation against certain deferred tax assets, offset by the California Competes Tax Credit.

The Section 45X Advanced Manufacturing Production Credit (the “45X Credit”) provides a credit equal to 10% of eligible “production costs incurred” with respect to the production and sale of critical minerals, including NdPr oxide. In December 2023, the Internal Revenue Service released proposed regulations on the 45X Credit, which, among other things, clarified the definition of “production costs incurred.” The proposed regulations exclude direct and indirect materials costs, including costs related to the extraction or acquisition of raw materials, from the definition of “production costs incurred.” If the proposed regulations are approved as currently written, the exclusion of these costs may result in the 45X Credit being materially less than we originally anticipated. We formally submitted comments on the proposed regulations in support of including materials and extraction costs in the definition of “production costs incurred” related to critical minerals under the 45X Credit. For additional information on the 45X Credit, refer to Note 12, “Income Taxes,” and Note 16, “Government Grants,” in the notes to the Consolidated Financial Statements.

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Quarterly Performance Trend

While our business is not highly seasonal in nature, we sometimes experience a timing lag between production and sales, which may result in volatility in our results of operations between periods. The timing lag may be the result of, or influenced by, factors such as the timing and duration of shipments or the time required to convert materials. In addition, quarterly production of concentrate is impacted by the timing of scheduled outages of our production facilities for maintenance, which typically occur in the second and fourth quarters. Finally, starting in the third quarter of 2023, as we ramp up production of separated rare earth materials, we expect that significant volumes of REO produced will be retained for separation and not sold as concentrate.

The following table presents our KPIs for the quarterly periods indicated:

[[GREPCENT_TABLE]]
[["","FY2023","","FY2022","","FY2021"],["(in whole units or dollars)","Q4","","Q3","","Q2","","Q1","","Q4","","Q3","","Q2","","Q1","","Q4","","Q3","","Q2","","Q1"],["Rare earth concentrate"],["REO Production Volume (MTs)","9,257","","","10,766","","","10,863","","","10,671","","","10,485","","","10,886","","","10,300","","","10,828","","","10,261","","","11,998","","","10,305","","","9,849"],["REO Sales Volume (MTs)","7,174","","","9,177","","","10,271","","","10,215","","","10,816","","","10,676","","","10,000","","","11,706","","","9,674","","","12,814","","","9,877","","","9,793"],["Realized Price per REO MT","$","5,622","","","$","5,718","","","$","6,231","","","$","9,365","","","$","8,515","","","$","11,636","","","$","13,918","","","$","13,818","","","$","10,101","","","$","7,693","","","$","7,343","","","$","5,891"],["Production Cost per REO MT(1)","$","2,393","","","$","2,020","","","$","1,938","","","$","1,978","","","$","1,928","","","$","1,653","","","$","1,750","","","$","1,594","","","$","1,525","","","$","1,449","","","$","1,538","","","$","1,475"],["Separated NdPr products"],["NdPr Production Volume (MTs)","150","","","50","","","N/A","","N/A","","N/A","","N/A","","N/A","","N/A","","N/A","","N/A","","N/A","","N/A"],["NdPr Sales Volume (MTs)","10","","","\u2014","","","N/A","","N/A","","N/A","","N/A","","N/A","","N/A","","N/A","","N/A","","N/A","","N/A"],["NdPr Realized Price per KG","$","70","","","N/A","","N/A","","N/A","","N/A","","N/A","","N/A","","N/A","","N/A","","N/A","","N/A","","N/A"],["N/A = Not applicable as there was either no NdPr production volume or no NdPr sales volume in these periods."]]
[[/GREPCENT_TABLE]]

(1)As noted above, beginning with the first quarter of 2024, we will no longer present Production Cost per REO MT as this metric is focused solely on Stage I concentrate operations.

Liquidity and Capital Resources

Liquidity refers to our ability to generate sufficient cash flows to meet the cash requirements of our business operations, including working capital and capital expenditure needs, contractual obligations, debt service and other commitments. In recent years, our principal sources of liquidity have been financing through the consummation of the business combination with Fortress Value Acquisition Corp. in November 2020, the issuance of the Convertible Notes in March 2021, and net cash from operating activities. As of December 31, 2023, we had $997.8 million of cash, cash equivalents and short-term investments and $690.0 million principal amount of long-term debt.

Our results of operations and cash flows depend in large part upon the market prices of REO and particularly the price of rare earth concentrate. Rare earth concentrate is not quoted on any major commodities market or exchange and demand is currently constrained to a relatively limited number of refiners, a significant majority of which are based in China. Although we believe that our cash flows from operations and cash on hand are adequate to meet our liquidity requirements for the foreseeable future, uncertainty continues to exist as to the market price of REO, as evidenced by the volatility experienced in 2022 and the significant decrease seen in 2023, primarily due to concerns over the global economic conditions and actual or perceived concerns over increases in the supply of and/or decreases in demand for rare earth products. The significant decrease in the market price of rare earth products in 2023 negatively impacted our cash flows from operations and liquidity.

Our current working capital needs relate mainly to our mining, beneficiation, and separation operations. As we began the transition to selling separated rare earth products in 2023, our working capital needs increased materially, portions of which we expect to continue in 2024 as we ramp up the production and sales of separated rare earth products and advance our Stage III magnetics initiatives.

The completion of our mission to become a fully integrated domestic magnetics producer is expected to be capital intensive. With the construction portion of our Stage II optimization project complete, our principal capital expenditure requirements relate mainly to further investment in Mountain Pass, including the development of the HREE Facility, Upstream 60K, and other growth and investment projects, completing the buildout of the Fort Worth Facility, as well as periodic repairs and maintenance of mining and rare earth processing equipment. We expect to spend between $200 million and $250 million of capital costs in 2024, with further costs for all of these identified projects in 2025. Our future capital requirements will also depend on several other factors, including future acquisitions and potential additional investments in further downstream production.

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Our estimated costs or estimated time to complete and commission these projects may increase, potentially significantly, due to factors outside of our control. While we believe that we have sufficient cash resources to fund these initiatives and operating working capital in the near term, we cannot assure this. If our available resources prove inadequate to fund our plans or commitments, we may be forced to revise our strategy and business plans or could be required, or elect, to seek additional funding through public or private equity or debt financings; however, such funding may not be available on terms acceptable to us, if at all. Any delays in our ongoing capital projects or substantial cost increases, including construction costs and related materials costs related to their execution, could significantly impact our ability to maximize our revenue opportunities and adversely impact our business and cash flows.

Debt and Other Long-Term Obligations

Convertible Notes: In March 2021, we issued $690.0 million aggregate principal amount of 0.25% unsecured green convertible senior notes that mature, unless earlier converted, redeemed or repurchased, on April 1, 2026 (the “Convertible Notes”), at a price of par. Interest on the Convertible Notes is payable on April 1st and October 1st of each year, beginning on October 1, 2021.

The Convertible Notes may, at our election, be settled in cash, shares of our common stock, or a combination thereof. We have the option to redeem the Convertible Notes, in whole or in part, beginning on April 5, 2024. The Convertible Notes are convertible into shares of our common stock at an initial conversion price of $44.28 per share, or 22.5861 shares, per $1,000 principal amount of notes, subject to adjustment upon the occurrence of certain corporate events. However, in no event will the conversion exceed 28.5714 shares of common stock per $1,000 principal amount of notes.

Prior to January 1, 2026, at their election, holders of the Convertible Notes may convert their outstanding notes under the following circumstances: (i) during any calendar quarter commencing with the third quarter of 2021 if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (ii) during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price (as defined in the indenture governing the Convertible Notes) per $1,000 principal amount of Convertible Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; (iii) if we call any or all of the Convertible Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or (iv) upon the occurrence of specified corporate events set forth in the indenture governing the Convertible Notes. On or after January 1, 2026, and prior to the maturity date of the Convertible Notes, holders may convert their outstanding notes at any time, regardless of the foregoing circumstances.

If we undergo a fundamental change (as defined in the indenture governing the Convertible Notes), holders may require us to repurchase for cash all or any portion of their outstanding notes at a price equal to 100% of the principal amount of the notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. In addition, following certain corporate events that occur prior to the maturity date of the Convertible Notes or if we deliver a notice of redemption, we will, in certain circumstances, increase the conversion rate for holders who elect to convert their outstanding notes in connection with such corporate event or notice of redemption, as the case may be.

At the time of issuance, we aimed to allocate an amount equal to the net proceeds from the Convertible Notes offering to existing or future investments in, or the financing or refinancing of, eligible “green projects” intended to reduce our environmental impact and/or enable the production of low-carbon technologies. As of December 31, 2023, all the net proceeds from the Convertible Notes offering were allocated to investments in eligible green projects, including through the utilization of the permitted 36-month lookback period. Until such time that the allocation was complete, the net proceeds were held for general corporate purposes.

Equipment Notes: We have financing agreements for the purchase of certain equipment, including trucks, tractors, loaders, graders, and various other machinery. As of December 31, 2023, we had $4.7 million in principal (and accrued interest) outstanding under the equipment notes, of which $2.1 million is due within the next 12 months.

Leases: We have lease arrangements for certain equipment and facilities, including office space, vehicles and equipment used in our operations. As of December 31, 2023, we had future expected lease payment obligations totaling $10.4 million, with $1.7 million due within the next 12 months. See Note 11, “Leases,” in the notes to the Consolidated Financial Statements for further information.

Purchase Obligations: Our outstanding purchase obligations as of December 31, 2023, primarily consist of purchase orders initiated with vendors and suppliers in the ordinary course of business for operating and maintenance capital

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expenditures that will be settled within one year. In certain instances, we are permitted to cancel, reschedule or adjust these orders. Consequently, only a small portion of these outstanding purchase orders relate to firm, non-cancelable and unconditional obligations. We have also entered into long-term supply arrangements for certain chemical reagents used in our operations, which is based on current consumption requirements.

Asset Retirement and Environmental Obligations: See Note 8, “Asset Retirement and Environmental Obligations,” in the notes to the Consolidated Financial Statements for our estimated cash requirements to settle asset retirement and environmental obligations.

Other: In order to support our Fort Worth Facility, we expect to hire at least an additional 100 full-time employees within the next two years, which will result in additional cash requirements for salaries, benefits and training. We also expect to spend an additional $5 million to $6 million within the next year on completing the implementation of a new enterprise resource planning system. Lastly, our engineering, procurement, and construction contracts are typically cancellable.

Cash Flows

The following table summarizes our cash flows:

[[GREPCENT_TABLE]]
[["","For the year ended December 31,","","Amount Change","","% Change"],["(in thousands, except percentages)","2023","","2022","","2021","","2023 vs 2022","","2022 vs 2021","","2023 vs 2022","","2022 vs 2021"],["Net cash provided by (used in):"],["Operating activities","$","62,699","","","$","343,514","","","$","101,971","","","$","(280,815)","","","$","241,543","","","(82)","%","","237","%"],["Investing activities","$","68,697","","","$","(1,356,971)","","","$","(119,363)","","","$","1,425,668","","","$","(1,237,608)","","","N/M","","N/M"],["Financing activities","$","(9,917)","","","$","(24,191)","","","$","666,109","","","$","14,274","","","$","(690,300)","","","(59)","%","","N/M"]]
[[/GREPCENT_TABLE]]

N/M = Not meaningful.

Net Cash Provided by Operating Activities: Net cash provided by operating activities decreased by $280.8 million for the year ended December 31, 2023, as compared to the prior year, reflecting a decrease in revenue, an increase in inventories to support our Stage II separations facilities as well as our Stage III initiatives, and a $1.2 million increase in cash paid for income taxes, as compared to the prior year. The decrease in net cash provided by operating activities was partially offset by a $20.4 million increase in interest received on our short-term investments and money market funds for the year ended December 31, 2023, as compared to the prior year. In addition, $13.6 million of our revenue was excluded from cash provided by operating activities for the year ended December 31, 2022, since that portion of the sales price was retained by Shenghe to reduce the debt obligation, with no similar amount in the current year.

Net Cash Provided by (Used in) Investing Activities: Net cash provided by investing activities was $68.7 million for the year ended December 31, 2023, compared to net cash used in investing activities of $1,357.0 million in the prior year. The change related primarily to activity in our short-term investments, with the total activity (i.e., purchases, sales, and maturities) in the current year resulting in net cash proceeds of $337.4 million, which were largely used to fund additions to property, plant and equipment. For the year ended December 31, 2022, the total activity in our short-term investments resulted in net cash purchases of $1,035.5 million. Additions to property, plant and equipment for the year ended December 31, 2023, which related primarily to construction spend on our Stage II optimization project, the Fort Worth Facility, and other investments in Mountain Pass, decreased by $64.7 million when compared to the prior year, which was largely due to the timing of substantially completing the assets associated with the Stage II optimization project. Net cash provided by investing activities in the current year was partially offset by a $9.7 million payment in exchange for a 49% equity interest in VREX Holdco.

Net Cash Used in Financing Activities: Net cash used in financing activities decreased by $14.3 million for the year ended December 31, 2023, as compared to the prior year, reflecting lower tax withholding on stock-based awards and lower principal payments on debt obligations and finance leases, principally due to a $2.9 million payment to Shenghe in the prior year to fully satisfy the debt obligation.

Non-GAAP Financial Measures

We present Adjusted EBITDA, Adjusted Net Income, Adjusted Diluted EPS, Free Cash Flow, Production Costs, and Total Value Realized, which are non-GAAP financial measures that we use to supplement our results presented in accordance with GAAP. These measures may be similar to measures reported by other companies in our industry and are regularly used by securities analysts and investors to measure companies’ financial performance. Adjusted EBITDA, Adjusted Net Income,

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Adjusted Diluted EPS, Free Cash Flow, Production Costs, and Total Value Realized are not intended to be substitutes for any GAAP financial measures and, as calculated, may not be comparable to other similarly titled measures of performance or liquidity of other companies within our industry or in other industries.

Adjusted EBITDA

We define Adjusted EBITDA as our GAAP net income before interest expense, net; income tax expense or benefit; and depreciation, depletion and amortization; further adjusted to eliminate the impact of stock-based compensation expense; initial start-up costs; transaction-related and other costs; accretion of asset retirement and environmental obligations; gain or loss on disposals of long-lived assets; certain write-downs of inventories; tariff rebates; and other income or loss. We present Adjusted EBITDA because it is used by management to evaluate our underlying operating and financial performance and trends. Adjusted EBITDA excludes certain expenses that are required in accordance with GAAP because they are non-recurring, non-cash or are not related to our underlying business performance. This non-GAAP financial measure is intended to supplement our GAAP results and should not be used as a substitute for financial measures presented in accordance with GAAP.

The following table presents a reconciliation of our Adjusted EBITDA, which is a non-GAAP financial measure, to our net income, which is determined in accordance with GAAP:

[[GREPCENT_TABLE]]
[["","For the year ended December 31,"],["(in thousands)","2023","","2022","","2021"],["Net income","$","24,307","","","$","289,004","","","$","135,037"],["Adjusted for:"],["Depreciation, depletion and amortization","55,709","","","18,356","","","24,382"],["Interest expense, net","5,254","","","5,786","","","8,904"],["Income tax expense","8,768","","","52,148","","","25,158"],["Stock-based compensation expense(1)","25,236","","","31,780","","","22,931"],["Initial start-up costs(2)","20,607","","","7,432","","","378"],["Transaction-related and other costs(3)","11,435","","","1,784","","","3,338"],["Accretion of asset retirement and environmental obligations(4)","908","","","1,477","","","2,375"],["Loss on disposals of long-lived assets, net(4)","6,326","","","391","","","569"],["Write-down of inventories(4)(5)","\u2014","","","\u2014","","","1,809"],["Tariff rebate(6)","\u2014","","","\u2014","","","(2,050)"],["Other income, net(7)","(56,048)","","","(19,527)","","","(3,754)"],["Adjusted EBITDA","$","102,502","","","$","388,631","","","$","219,077"]]
[[/GREPCENT_TABLE]]

(1)Principally included in “Selling, general and administrative” within our Consolidated Statements of Operations.

(2)Included in “Start-up costs” within our Consolidated Statements of Operations and excludes any applicable stock-based compensation, which is included in the “Stock-based compensation expense” line above. Relates to certain costs incurred in connection with the commissioning and starting up of our initial separations capability at Mountain Pass and our initial magnet-making capabilities at Fort Worth prior to the achievement of commercial production. These costs include labor of incremental employees hired in advance to work directly on such commissioning activities, training costs, costs of testing and commissioning the new circuits and processes, and other related costs. Given the nature and scale of the related costs and activities, management does not view these as normal, recurring operating expenses, but rather as non-recurring investments to initially develop our separations and magnet-making capabilities. Therefore, we believe it is useful and necessary for investors to understand our core operating performance in current and future periods by excluding the impact of these start-up costs. To the extent additional start-up costs are incurred in the future to expand our separations and magnet-making capabilities after initial achievement of commercial production (e.g., significantly expanding production capacity at an existing facility or building a new separations or magnet manufacturing facility), such costs would not be considered an adjustment for this non-GAAP financial measure.

(3)Principally included in “Advanced projects and development” within our Consolidated Statements of Operations, and pertains to legal, consulting, and advisory services, and other costs associated with specific transactions, including potential acquisitions, mergers, or other investments.

(4)Included in “Other operating costs and expenses” within our Consolidated Statements of Operations.

(5)Represents a non-cash write-down of a portion of our legacy low-grade stockpile inventory during the second quarter of 2021.

(6)Represents non-cash revenue recognized in connection with a tariff rebate received relating to product sales from prior periods.

(7)Amounts for the years ended December 31, 2023 and 2022, are principally comprised of interest and investment income. Amount for the year ended December 31, 2021, principally represents a non-cash gain recognized as a result of the Small Business Administration’s approval to forgive the Paycheck Protection Loan.

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Adjusted Net Income and Adjusted Diluted EPS

We calculate Adjusted Net Income as our GAAP net income excluding the impact of stock-based compensation expense; initial start-up costs; transaction-related and other costs; gain or loss on disposals of long-lived assets; certain write-downs of inventories; tariff rebates; and other items that we do not consider representative of our underlying operations; adjusted to give effect to the income tax impact of such adjustments; and the release of valuation allowance. We calculate Adjusted Diluted EPS as our GAAP diluted EPS excluding the per share impact, using adjusted diluted weighted-average shares outstanding as the denominator, of stock-based compensation expense; initial start-up costs; transaction-related and other costs; gain or loss on disposals of long-lived assets; certain write-downs of inventories; tariff rebates; and other items that we do not consider representative of our underlying operations; adjusted to give effect to the income tax impact of such adjustments; and the release of valuation allowance.

Adjusted Net Income and Adjusted Diluted EPS exclude certain expenses that are required in accordance with GAAP because they are non-recurring, non-cash, or not related to our underlying business performance. To calculate the income tax impact of such adjustments on a year-to-date basis, we utilize an effective tax rate equal to our income tax expense excluding material discrete costs and benefits, with any impacts of changes in effective tax rate being recognized in the current period. We present Adjusted Net Income and Adjusted Diluted EPS because it is used by management to evaluate our underlying operating and financial performance and trends. These non-GAAP financial measures are intended to supplement our GAAP results and should not be used as a substitute for financial measures presented in accordance with GAAP.

The following table presents a reconciliation of our Adjusted Net Income, which is a non-GAAP financial measure, to our net income, which is determined in accordance with GAAP:

[[GREPCENT_TABLE]]
[["","For the year ended December 31,"],["(in thousands)","2023","","2022","","2021"],["Net income","$","24,307","","","$","289,004","","","$","135,037"],["Adjusted for:"],["Stock-based compensation expense(1)","25,236","","","31,780","","","22,931"],["Initial start-up costs(2)","20,607","","","7,432","","","378"],["Transaction-related and other costs(3)","11,435","","","1,784","","","3,338"],["Loss on disposals of long-lived assets, net(4)","6,326","","","391","","","569"],["Write-down of inventories(4)(5)","\u2014","","","\u2014","","","1,809"],["Tariff rebate(6)","\u2014","","","\u2014","","","(2,050)"],["Other(7)","(51)","","","(273)","","","(3,754)"],["Tax impact of adjustments above(8)","(16,482)","","","(6,716)","","","(4,071)"],["Release of valuation allowance","\u2014","","","(2,845)","","","\u2014"],["Adjusted Net Income","$","71,378","","","$","320,557","","","$","154,187"]]
[[/GREPCENT_TABLE]]

(1)Principally included in “Selling, general and administrative” within our Consolidated Statements of Operations.

(2)Included in “Start-up costs” within our Consolidated Statements of Operations and excludes any applicable stock-based compensation, which is included in the “Stock-based compensation expense” line above. Relates to certain costs incurred in connection with the commissioning and starting up of our initial separations capability at Mountain Pass and our initial magnet-making capabilities at Fort Worth prior to the achievement of commercial production. These costs include labor of incremental employees hired in advance to work directly on such commissioning activities, training costs, costs of testing and commissioning the new circuits and processes, and other related costs. Given the nature and scale of the related costs and activities, management does not view these as normal, recurring operating expenses, but rather as non-recurring investments to initially develop our separations and magnet-making capabilities. Therefore, we believe it is useful and necessary for investors to understand our core operating performance in current and future periods by excluding the impact of these start-up costs. To the extent additional start-up costs are incurred in the future to expand our separations and magnet-making capabilities after initial achievement of commercial production (e.g., significantly expanding production capacity at an existing facility or building a new separations or magnet manufacturing facility), such costs would not be considered an adjustment for this non-GAAP financial measure.

(3)Principally included in “Advanced projects and development” within our Consolidated Statements of Operations, and pertains to legal, consulting, and advisory services, and other costs associated with specific transactions, including potential acquisitions, mergers, or other investments.

(4)Included in “Other operating costs and expenses” within our Consolidated Statements of Operations.

(5)Represents a non-cash write-down of a portion of our legacy low-grade stockpile inventory during the second quarter of 2021.

(6)Represents non-cash revenue recognized in connection with a tariff rebate received relating to product sales from prior periods.

(7)Amount for the year ended December 31, 2021, principally represents a non-cash gain recognized as a result of the Small Business Administration’s approval to forgive the Paycheck Protection Loan, which is included in “Other income, net” within our Consolidated Statements of Operations.

(8)Tax impact of adjustments is calculated using an adjusted effective tax rate, which excludes the impact of discrete tax costs and benefits, to each adjustment. The adjusted effective tax rates were 25.9%, 16.3% and 17.5% for the years ended December 31, 2023, 2022 and 2021, respectively. See Note 12, “Income Taxes,” in the notes to the Consolidated Financial Statements for more information on the effective tax rate.

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The following table presents a reconciliation of our Adjusted Diluted EPS, which is a non-GAAP financial measure, to our diluted EPS, which is determined in accordance with GAAP:

[[GREPCENT_TABLE]]
[["","For the year ended December 31,"],["","2023","","2022","","2021"],["Diluted EPS","$","0.14","","","$","1.52","","","$","0.73"],["Adjusted for:"],["Stock-based compensation expense","0.13","","","0.16","","","0.12"],["Initial start-up costs","0.11","","","0.04","","","\u2014"],["Transaction-related and other costs","0.06","","","0.01","","","0.02"],["Loss on disposals of long-lived assets, net","0.03","","","\u2014","","","\u2014"],["Write-down of inventories","\u2014","","","\u2014","","","0.01"],["Tariff rebate","\u2014","","","\u2014","","","(0.01)"],["Other","\u2014","","","\u2014","","","(0.02)"],["Tax impact of adjustments above(1)","(0.08)","","","(0.04)","","","(0.02)"],["Release of valuation allowance","\u2014","","","(0.01)","","","\u2014"],["Adjusted Diluted EPS","$","0.39","","","$","1.68","","","$","0.83"],["Diluted weighted-average shares outstanding","178,152,212","","","193,453,087","","","189,844,028"],["Assumed conversion of Convertible Notes(2)","15,584,409","","","\u2014","","","\u2014"],["Adjusted diluted weighted-average shares outstanding","193,736,621","","","193,453,087","","","189,844,028"]]
[[/GREPCENT_TABLE]]

(1)Tax impact of adjustments is calculated using an adjusted effective tax rate, which excludes the impact of discrete tax costs and benefits, to each adjustment. The adjusted effective tax rates were 25.9%, 16.3% and 17.5% for the years ended December 31, 2023, 2022 and 2021, respectively. See Note 12, “Income Taxes,” in the notes to the Consolidated Financial Statements for more information on the effective tax rate.

(2)The Convertible Notes were antidilutive for GAAP purposes for the year ended December 31, 2023. For purposes of calculating Adjusted Diluted EPS, we have added back the assumed conversion of the Convertible Notes since they would not be antidilutive when using Adjusted Net Income as the numerator in the calculation of Adjusted Diluted EPS.

Total Value Realized

Total Value Realized, which we used to calculate our KPI, Realized Price per REO MT, for the year ended December 31, 2021, is a non-GAAP financial measure. The following table presents a reconciliation of our Total Value Realized, to our rare earth concentrate sales, which is determined in accordance with GAAP, for the year ended December 31, 2021:

[[GREPCENT_TABLE]]
[["(in thousands)","For the year ended December 31, 2021"],["Rare earth concentrate sales","$","328,563"],["Adjusted for:"],["Tariff rebate(1)","(2,050)"],["Total Value Realized","$","326,513"]]
[[/GREPCENT_TABLE]]

(1)Represents non-cash revenue recognized in connection with a tariff rebate received relating to product sales from prior periods.

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Production Costs

Production Costs, which we use to calculate our KPI, Production Cost per REO MT, is a non-GAAP financial measure. Production Cost per REO MT is a key indicator of our concentrate production efficiency. As mentioned above, beginning with the first quarter of 2024, we will no longer present Production Cost per REO MT, which is a metric focused solely on Stage I concentrate operations, as it will no longer be meaningful in evaluating and understanding our business or operating results. Accordingly, we will also no longer present Production Costs.

The following table presents a reconciliation of our Production Costs to our COS, which is determined in accordance with GAAP, as well as the calculation of Production Cost per REO MT:

[[GREPCENT_TABLE]]
[["","For the year ended December 31,"],["(in thousands, unless otherwise stated)","2023","","2022","","2021"],["Cost of sales (excluding depreciation, depletion and amortization)","$","92,714","","","$","92,218","","","$","76,253"],["Adjusted for:"],["Stock-based compensation expense(1)","(3,932)","","","(2,853)","","","(4,294)"],["Shipping and freight(2)","(7,485)","","","(13,002)","","","(8,923)"],["Write-down of inventories(3)","(2,285)","","","\u2014","","","\u2014"],["Other(4)","(3,198)","","","(1,715)","","","(79)"],["Production Costs","75,814","","","74,648","","","62,957"],["Divided by:"],["REO Sales Volume (in MTs)","36,837","","","43,198","","","42,158"],["Production Cost per REO MT (in dollars)","$","2,058","","","$","1,728","","","$","1,493"]]
[[/GREPCENT_TABLE]]

(1)Pertains only to the amount of stock-based compensation expense included in “Cost of sales (excluding depreciation, depletion and amortization)” within our Consolidated Statements of Operations.

(2)Includes $1.3 million for the year ended December 31, 2022, of shipping and freight costs associated with sales of REF stockpiles.

(3)Amount pertains to a write-down of non-concentrate inventories, which is included in “Cost of sales (excluding depreciation, depletion and amortization)” within the Consolidated Statements of Operations.

(4)Amount for the year ended December 31, 2023, pertains to costs (excluding shipping and freight) associated with non-concentrate products. Amount for the year ended December 31, 2022, pertains primarily to costs (excluding shipping and freight) attributable to sales of REF stockpiles.

Free Cash Flow

We calculate Free Cash Flow as net cash provided by operating activities less additions to property, plant and equipment, net of proceeds from government awards used for construction. We believe Free Cash Flow is useful for comparing our ability to generate cash with that of our peers. The presentation of Free Cash Flow is not meant to be considered in isolation or as an alternative to cash flows from operating activities and does not necessarily indicate whether cash flows will be sufficient to fund cash needs.

The following table presents a reconciliation of our Free Cash Flow, which is a non-GAAP financial measure, to our net cash provided by operating activities, which is determined in accordance with GAAP:

[[GREPCENT_TABLE]]
[["","For the year ended December 31,"],["(in thousands)","2023","","2022","","2021"],["Net cash provided by operating activities(1)","$","62,699","","","$","343,514","","","$","101,971"],["Additions to property, plant and equipment, net(2)","(259,097)","","","(321,465)","","","(119,488)"],["Free Cash Flow","$","(196,398)","","","$","22,049","","","$","(17,517)"]]
[[/GREPCENT_TABLE]]

(1)Under the terms of the A&R Offtake Agreement and pursuant to the accounting treatment thereof, $13.6 million and $54.8 million of our revenue for the years ended December 31, 2022 and 2021, respectively, was excluded from cash provided by operating activities since that portion of the sales price was retained by Shenghe to reduce the debt obligation.

(2)Amounts for the years ended December 31, 2023, 2022 and 2021, are net of $2.8 million, $5.1 million and $4.4 million, respectively, in proceeds from government awards used for construction.

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Critical Accounting Estimates

Preparation of the Consolidated Financial Statements in accordance with GAAP requires our management to make judgments, estimates and assumptions that impact the reported amount of revenue and operating expenses, assets and liabilities and the disclosure of contingent assets and liabilities. We consider an accounting judgment, estimate or assumption to be critical when (i) the estimate or assumption is complex in nature or requires a high degree of judgment and (ii) the use of different judgments, estimates and assumptions could have a material impact on our Consolidated Financial Statements. Our significant accounting policies are described in Note 2, “Significant Accounting Policies,” in the notes to the Consolidated Financial Statements. Our critical accounting estimates are described below.

Revenue

We recognize revenue from sales of rare earth products produced at Mountain Pass. Shenghe purchased the vast majority of our production for the years ended December 31, 2023, 2022 and 2021, and is an affiliate of an equity holder of MP Materials. We recognize revenue at the point in time control of the products transfers to the customer and, under our offtake agreements with Shenghe, our performance obligation is typically satisfied when we deliver products to the agreed-upon shipping point. The transaction price with Shenghe is typically based on an agreed-upon price per MT, with an adjustment for the ultimate market price of the product realized by Shenghe in their sales to their customers, further adjusted for certain contractually negotiated amounts. At the end of each reporting period, we estimate forms of variable consideration, including an assessment on constraining such variable consideration, based on historical experience, current market prices and currency exchange rates, and other factors that can be reasonably anticipated. Historically, the differences between our estimates of variable consideration and actual consideration have not been material to any reporting period.

Asset Retirement Obligations

We recognize asset retirement obligations for estimated costs of legally and contractually required closure, dismantlement, and reclamation activities associated with Mountain Pass. Asset retirement obligations are initially recognized at their estimated fair value in the period in which the obligation is incurred. In determining fair value, management makes estimates based on the expected timing of reclamation activities; cash flows to perform activities, which involves utilizing an assumption for future inflation; amount and uncertainty associated with the cash flows, including adjustments for a market risk premium; and discounts such amounts using a credit-adjusted risk-free rate. Although we base our estimates on historical experience and reevaluate our estimated timing and cash flows regularly, since the majority of the cash flows to settle our asset retirement obligations occur decades in the future, it is inherently difficult to accurately predict the ultimate cash flows used to settle such obligations. As a result, these estimates and assumptions are subjective and can vary over time.

Since December 31, 2020, our asset retirement obligations have decreased from $25.6 million to $5.7 million as of December 31, 2023, as a result of revisions in our estimated timing and cash flows pertaining to required reclamation activities. In particular, as a result of an updated life-of-mine, which revised the estimated timing of cash flows by approximately an additional 13 years, we recorded a decrement of $9.8 million during the year ended December 31, 2021. Furthermore, during the year ended December 31, 2022, we recorded a decrement of $13.1 million, the effect of removing estimated cash flows pertaining to certain of our processing and separations facilities at Mountain Pass that no longer required reclamation. See Note 8, “Asset Retirement and Environmental Obligations,” in the notes to the Consolidated Financial Statements for more information.

Recently Adopted and Issued Accounting Pronouncements

Recently adopted and issued accounting pronouncements are described in Note 2, “Significant Accounting Policies,” in the notes to the Consolidated Financial Statements.