Prepared remarks
Hello, and welcome to the MP Materials Q2 2026 Earnings Call. Operator Instructions. Also as a reminder, this conference is being recorded. If you have any objections, please disconnect at this time. With that, I would like to turn the call over to Martin Sheehan, Head of Investor Relations. Mr. Sheehan, you may begin.
Thank you, operator, and good afternoon, everyone. Welcome to the MP Materials Second Quarter 2026 Earnings Conference Call. With me today from MP Materials are Jim Litinsky, Founder, Chairman and Chief Executive Officer; Michael Rosenthal, Founder and Chief Operating Officer; and Ryan Corbett, Chief Financial Officer. As a reminder, today's discussion will contain forward-looking statements relating to future events and expectations that are subject to various assumptions and caveats. Factors that may cause the company's actual results to differ materially from these statements are included in today's presentation, earnings release, and in our SEC filings. In addition, we have included some non-GAAP financial measures in this presentation. Reconciliations to the most directly comparable GAAP financial measures can be found in today's earnings release and the appendix to today's slide presentation. Any reference in our discussion today to EBITDA means adjusted EBITDA and tons means metric tons. Finally, the earnings release and slide presentation are available on our website. With that, I'll turn the call over to Jim.
Thank you, Martin, and thank you all for joining us today. This was another strong quarter of execution as we continued scaling both our materials and magnetics businesses. We expanded production, broadened our product portfolio, advanced commercial magnet manufacturing, and continued building the next phase of our operating platform. Starting with the Materials segment, we produced 840 metric tons of NdPr, up 41% year-over-year and consistent with our expectations. Despite an extended planned plant shutdown in April, we met our production objectives while continuing to improve throughput as we ramp production at scale. We expect significant volume growth next quarter as we continue progressing toward our targeted year-end NdPr production run rate. Michael will discuss our operational progress in greater detail shortly. Importantly, customer demand continues to outpace our production growth.
NdPr sales exceeded 1,000 metric tons for the second consecutive quarter, up 127% year-over-year. As we scale NdPr production, our engineering and operations teams are also advancing three major initiatives: commissioning the heavy rare earth separation circuit, restarting our on-site chlor-alkali facility, and breaking ground on our new recycling facility. Michael will discuss these initiatives in greater detail, but I want to highlight that we are actively commissioning our Dy Tb circuit and remain on track to begin shipping product from Mountain Pass to Independence later this year. In July, we entered into a long-term agreement to supply gadolinium oxide to a leading U.S. aerospace and defense manufacturer. This is expected to be a sizable nine-figure deal in total over multiple years that expands our heavy rare earth product portfolio at attractive returns. Our heavy rare earth strategy is deliberately disciplined.
We expand our product portfolio where customer demand and attractive returns justify investment, building the Materials segment one product at a time. We believe this approach can continue to expand both our product portfolio and the segment's long-term earnings power. Our operating progress also translated into strong financial performance. The Materials segment generated $113.2 million of revenue plus PPA income and $32.5 million of adjusted EBITDA, a $45 million year-over-year improvement. Turning to Magnetics. Start-up and customer qualification activities at Independence continue to advance. During the quarter, we delivered magnets to GM for in-vehicle qualification testing, and we continue to expect to begin commercial shipments in the fourth quarter, followed by a steady production ramp. Precursor production generated adjusted EBITDA margins exceeding 40%, highlighting the earnings potential of the Magnetic segment as we continue scaling the business.
Ryan will discuss how the economics of the segment evolve as we ramp commercial magnet production over the coming quarters. At the same time, construction of our 10X facility continues to accelerate. Foundation work is underway. Long lead production equipment has been ordered, and we are prepared to begin vertical construction shortly. As we ramp Independence, we are already building the next phase of America's domestic magnet manufacturing platform. Demand for secure large-scale magnet manufacturing continues to grow. Structural supply constraints remain, and we continue to see strong interest from customers across automotive, industrial, aerospace, defense, and emerging physical AI applications. With Independence substantially committed and the Department of Defense supporting the development of 10X, we are able to be disciplined in selecting long-term partners and structuring commercial agreements that reflect the strategic value of domestic magnet manufacturing.
We expect to have additional customer announcements over time. One area of particularly strong interest is autonomous systems. Over the past several months, we have worked with U.S. and allied drone manufacturers to launch Project Swarm, an industrial coordination initiative designed to aggregate and standardize future magnet demand. We have already signed subscription agreements with a number of participants. Rather than asking emerging companies to make long-term purchasing commitments before their products are fully developed, Project Swarm allows them to secure future manufacturing capacity today while preserving the flexibility to continue innovating. Project Swarm reflects our belief that industrial leadership requires more than manufacturing capacity. It also requires helping coordinate the ecosystem around it. By reducing supply chain uncertainty, we can help innovative companies focus on building the next generation of autonomous systems while strengthening America's industrial base and building long-term shareholder value. With that, let me turn the call over to Ryan. Ryan?
Thanks, Jim. The company generated $126.1 million of revenue and PPA income, more than doubling last year's revenue, driven primarily by the 127% increase in sales volumes of NdPr. The higher revenue and PPA income contributed to consolidated adjusted EBITDA of $28.5 million in the quarter, a $41 million improvement year-over-year. These factors also drove adjusted diluted EPS to improve $0.12 to a loss of $0.01 per share. On a sequential basis, materials revenue plus PPA income was essentially flat with identical sales volumes and the impact of the price floor. Magnetics revenue declined slightly, which was driven by a much higher proportion of costs being attributable to the start-up of magnet production versus precursor product production, which impacts the pricing of our metal products ahead of commercial magnet production. Consolidated adjusted EBITDA declined modestly, primarily reflecting the costs associated with the planned biannual plant shutdown at Mountain Pass and the transition period of Magnetics ahead of commercial magnet revenue.
Looking ahead to Q3, regarding pricing, our current view of sales mix and timing suggests that realized pricing for NdPr oxide sales will be in the high $90s per kilogram, leaving PPA income to come in at roughly $10 per kilogram. With market pricing hovering at about $110 per kilogram in the first part of Q3, we continue to expect minimal PPA income from stockpiled NdPr contained in concentrate that is stored in inventory, so would expect a slight sequential decline in overall PPA income. Given timing of shipments and metallization lead times, we expect sales volumes in the Materials segment to be flattish, depending on the ultimate sales mix. As of June 30, we had approximately 650 metric tons of NdPr oxide and metal on hand in transit at toll processors or waiting for shipment. Turning to Magnetics. The segment delivered another solid quarter of revenue and EBITDA performance, declining slightly sequentially as we discussed on our last call.
This leaves approximately $46 million of prepaid revenue to be earned for magnetic precursor products over the next three to four quarters on a modestly declining basis quarter-to-quarter. Once this pre-payment is fully recognized, we will no longer expect to produce these products for external sale and instead will dedicate metal production capacity towards our needs for the manufacture and delivery of finished magnets. As Jim also noted, we expect initial commercial magnet deliveries to start within the fourth quarter, beginning with modest volumes with capacity ramping over the following quarters. As I mentioned last quarter, in the short term, financials period-to-period will be impacted by the eventual roll-off of precursor product deliveries, the early scaling of magnet production, timing of certain product testing milestones at our customers' facilities, as well as investments in our team and product development capabilities.
Importantly, these efforts will pay off not only for scaled production for GM, but also our follow-on contracts with Apple and the Department of Defense as well as other future customers. Regarding cash flow, CapEx in the quarter was $230.3 million with a little over 60% attributable to the Magnetic segment. Note that in the second quarter, we acquired the 10X site for approximately $80 million. This brings our year-to-date spend to $308 million as of June 30. We continue to expect full year CapEx spend to be in the $500 million to $600 million range. Lastly, on the balance sheet, we ended the quarter with $1.45 billion of cash and short-term investments, together with expected improvements to operating cash flow from growing oxide sales, related cost reductions, as well as magnet production. This fully funds our long-term capital plan and preserves our fortress balance sheet. With that, let me turn it over to Michael. Michael?
Thanks, Ryan. Operationally, it was another solid quarter across both the Materials and Magnetics divisions as we continue to increase production while investing in the next phase of growth. At Mountain Pass, results were generally in line with expectations. Upstream production was solid. As we noted on our Q1 call, Q2 included our scheduled semi-annual maintenance outage and results reflected the normal effects of shutdown, maintenance, and restart activities associated with that work. Unrelated projects extended the downtime and that, along with the effects of certain pilot testing, contributed to the year-over-year comparisons. During the quarter, we advanced several important initiatives in the upstream business, including a full plant reagent trial that delivered very encouraging results. When implemented, we expect this change to sustain current performance while affording a positive impact on reclaimed water quality and providing greater resiliency in our supply chain, albeit at a modestly higher direct cost.
We also expanded pilot testing of a new pre-flot process that we now anticipate implementing at scale by 2028. This initiative will improve concentrate quality, but more important benefits may be realized in our mid-stream circuits with lower operating costs, improved uptime, and higher finished product quality. As I've discussed previously, we continue to look for both traditional and innovative ways to unlock additional value from the world-class Mountain Pass ore body. We are highly encouraged by early exploratory drilling results that suggest the potential for additional ore within the existing pit contours. Combined with ongoing advancements in flotation performance, a growing ability to manage variability in ore and gangue mineralogy, and several promising ore pre-concentration initiatives, I am increasingly confident in the long-term development potential of this unique asset. More to come on this in the coming quarters.
In our mid-stream operations, performance continues to show significant year-over-year growth and steady sequential improvement adjusted for scheduled downtime. Most of our circuits are performing very well, and we are seeing encouraging progress across the operation. Through targeted equipment upgrades and process enhancements, we are addressing the handful of circuits that continue to present reliability challenges affecting yield and throughput. While intermittent one-off issues occasionally impact production, overall plant reliability, throughput, and operational consistency continue to trend in the right direction. Based on current performance, I expect Q3 NdPr production to exceed 1,000 metric tons. The past three months have been particularly fruitful for our growth initiatives. In May, we achieved mechanical completion of our first heavy rare earth separation circuit. Since then, the team has been focused on punch list completion, equipment checkouts, and completing initial commissioning activities.
We are preparing to introduce feed to the circuit imminently. While the exact ramp will ultimately depend on the realities of commissioning a new circuit at scale and prioritizing quality over quantity, we remain on track to produce terbium and dysprosium later this year. We also made significant progress on our samarium program, advancing both engineering and procurement and are planning first production in 2028. As Jim noted, we are excited to have secured a long-term commercial arrangement for gadolinium at attractive economics. Combined with the technical success of an extended pilot campaign, we are now moving forward with engineering and procurement to complete the gadolinium separation project on a similar time line. In the quarter, we finished clearing land and demolition of previously retired assets and are planning to break ground this month on an expanded area that will house both magnet recycling and additional heavy rare earth separation and finishing.
This marks another important step in expanding the range of products and value-added capabilities at Mountain Pass. Lastly, we continue to make meaningful forward progress on our chlor-alkali recommissioning effort. Several important milestones were achieved during the quarter, including bringing additional brine pre-treatment online. We are already seeing positive results in crystallizer performance, providing an encouraging early indication of the operational benefits we expect the chlor-alkali project to deliver. Our Magnetics operation also had an extremely productive quarter. We made substantial progress in GM customer qualification activities while continuing to scale towards 24/7 production across all major processes. Importantly, we are now demonstrating the capability and consistency required to support our customers' volume ramp, clearing one of the most important milestones in the qualification process.
Achieving these milestones required extraordinary effort across the organization. As expected at this stage of the ramp, the team has had to work through a wide range of technical, operational, and customer-driven challenges. As we have said before, the rigor required to meet the auto industry's exacting standards positions us well to serve customers with the most demanding performance requirements. I am incredibly proud of what we have accomplished and continue to be impressed by the ingenuity, determination, and unwavering spirit our team brings to the mission every day. While there remains important work ahead, we are making very meaningful progress across the operation, and our foundational customers are increasingly seeing and validating that progress as well. The results of those efforts will become increasingly evident in the quarters ahead. Our partnership with Apple on magnet recycling, magnet production, and joint development continues to advance.
At the same time, our engineering team is expanding the portfolio of high-performance magnet-grades we can produce while continuously refining the underlying chemistry. Consistent with what we discussed last quarter, we are steadily reducing the heavy rare earth intensity of our products through both Grain Boundary Diffusion technology and other process innovations across each stage of production, and we expect that trend to continue. Finally, development of the 10X facility is advancing to plan. Learnings from Independence, combined with direct customer feedback are being incorporated into final equipment selections and detailed engineering of the plant. We are leveraging that experience to bring the project forward wherever possible while maintaining the discipline required to successfully execute a project of this scale, and we remain very much on track. Stepping back, one of the most rewarding aspects of this journey is seeing how the knowledge, experience, and capabilities we develop in one area continue to create opportunities in another.
Lessons from one facility improve another, new products open additional commercial opportunities, and operational advances create entirely new avenues for growth. That gives me tremendous confidence in both the underlying value of the vertically integrated platform we are building today and the opportunities it will enable us to pursue tomorrow. And with that, I'll hand it back to Jim.
Thanks, Michael. If there's one thing I hope today's update reinforces, it is that industrial companies are not built by assembling assets. They are built by compounding capabilities. Not every quarter is linear, but over time, every quarter should leave the business a little more capable, a little more resilient, and a little more valuable than it was before. That is what we try to do at MP. And I think this quarter was another good example. With that in mind, let me leave you with one broader thought. History suggests that markets often struggle to value general purpose technologies in real-time. During the railroad era, the age of electrification, and more recently, the telecommunications and Internet era, investors understandably became consumed with the same questions. Was too much capital being invested? Would the economics justify the spending? Which companies would ultimately earn attractive returns?
Those debates were important, but they often obscured where the largest long-term opportunities would ultimately emerge. The world itself was changing and the most enduring value was ultimately created by those who understood what the new world would require. I believe we are living through another one of those moments. Today's debate is centered on AI infrastructure and the returns on compute. That is an important discussion and market participants should ask those questions. But if history is any guide, the infrastructure phase of a general purpose technology is rarely where its full economic impact becomes apparent. The larger opportunity often emerges when that infrastructure becomes pervasive enough for entrepreneurs to build businesses that redefine entire industries. I believe AI is approaching that transition. The next phase will be defined less by creating intelligence and more by deploying it into the physical economy, into machines that manufacture, move, build, transport, and defend.
That transition has implications well beyond technology. Increasingly, governments recognize that the ability to build those machines and the supply chains that support them is itself a strategic capability. We believe that's a structural shift, not a cyclical one. It reinforces our conviction that resilient domestic production of critical materials and components will become increasingly important over the coming decade. Against that backdrop, our responsibility is straightforward. We try to build capabilities that matter over decades. We do that by investing patiently, allocating capital thoughtfully and increasingly by pairing long-term strategic partnerships with contracted cash flows that allow us to keep building through change. We believe that approach allows us to pursue long-term opportunities while managing risk along the way. With that, I will open it up for questions. Operator?
Questions and answers
Operator Instructions. Our first question will come from the line of Lawson Winder with Bank of America Securities.
Nice quarter. Great update once again. If I may, I'd like to just ask about the defense contract. Congratulations on achieving the first of that. My questions would be multi-part, but all related to this particular contract. To start off, would you describe this as the first of many? And then where do you think it kind of goes from here? And then if you could, maybe speak to how contracts like this might work. So would it be spot price linked or base escalated, there's no spot price exposure? And then just if it's relevant, what is the relevance or significance of gadolinium being the first mineral for this contract?
It's Ryan. I'll take that. Yes, obviously, we're very pleased with the progress here. It's a significant offtake agreement, as Jim mentioned in his remarks, a long-term deal, representing nine figures over time. Importantly, to your point on spot prices, we've locked in economics on this contract. And so I think, importantly, this speaks to our ability to continue to drive incremental value out of the world-class Mountain Pass asset, the ore body, the refining assets, the intellectual capital, the know-how. This is an example of, hopefully, many to come over time. The thing about this contract is the economics with this initial customer are very attractive on a stand-alone basis. But to your point and your question, there is an opportunity to grow volumes over time that would come at significant incremental return given the vast majority of the capital being deployed upfront. In terms of gadolinium being sort of the first that we've announced here, as you'll recall, we had committed in our agreements with the Department of Defense to begin production of samarium in 2028.
The way that we will approach separating out the dysprosium and terbium first, as Michael mentioned, very shortly, that leaves us with an SEG product that we had been evaluating how to maximize the economics from that product set. And this was a very logical way to do that. I think that there is opportunity for us to look at the other heavy rare earths contained in the ore body over time and continue to find interesting ways to grow the earnings power of that business.
Our next question comes from George Gianarikas with Canaccord Genuity.
Maybe rebuilding the critical material supply chain is as much a human capital challenge as it is a technical one. And so this has been out in the press recently. But to what extent is the broader domestic shortage of specialized talent, whether it's engineers or metallurgists, how is that impacting your ability to scale 10X and the other facilities you have planned?
Well, I think I'll start and then maybe Mike. I mean, certainly, as we look around the country and, really, around the world, but particularly in America, we have an enormous onshoring construction boom happening, especially with AI and data centers. When you think about construction—electricians, pipe fitters—it runs the gamut of the trades we need to bring a lot of this stuff online. Getting talent to build things is hard, but this is something we've been focused on since the beginning of the company. If you recall, we went public in the middle of COVID in 2020, and we were bringing online our refining assets. So historically, all we know as a company is fighting through challenges in supply chain, talent, and whatnot. With respect to more specific talent, yes, this is a capability that has not really existed in the country, certainly not on a vertically integrated basis. It's something we've been working on from the beginning, whether at the mine, the refinery, or building the magnetics business. Michael, I don't know if you want to add anything about the engineers and talent.
Yes. I think finding talented people who have experience is difficult; there's a limited pool of those in this country and around the world. We try to make ourselves an attractive place to work, empower people to do really interesting and exciting things, and give them a lot of resources. So we hope, through that, to be the employer of choice in this industry. And I think we're really, really proud of the team we've built.
Yes. And one thing I actually used to say this way back when, in the very beginning when we were sort of first public, but talent begets talent, scale begets scale. If you look at the business that we've built, whether it's contracted cash flows from GM, Apple, the Department of Defense, this new big customer announcement today, we certainly have built the momentum as a company, and we have a lot of people who want to join us on this mission. So we have a lot to build, but it's easier today than it was a few years ago because people know who we are and believe in what we're doing and know that the assets that we're creating are long term and priceless to some extent.
And if I may ask a follow-up. If, as you progress, prospective, excuse me, customers evaluate capacity at 10X, how are those allocation conversations progressing regarding pricing structure? Are partners willing to agree to things like pricing floors or upfront capital pre-payments to preserve and reserve future production slots?
No, it's an excellent question. I think this is really a question for us because when I look at all of the conversations we're having and the potential demand we see, I don't lose any sleep about filling out the demand for this facility. To give a simple example, if we think about physical AI and all of the growth we expect, and you look at what people say about the robotics industry, if the world were producing 30 million or 40 million humanoid robots a year, that alone would consume 100% of global rare earth magnet production, including China. The Chinese are going to make a lot of robots, and we're going to make cars, data centers, electronics, and many other things, so there's a lot of demand coming. I actually think we have the ability to be somewhat of a kingmaker in a couple of verticals. We can be thoughtful and patient because, as it stands today, we have everything fully contracted if that's what we want.
That logic also underlies Project Swarm. Although we are capitalists, we are first and foremost patriots. Drones are clearly a portion of the future of warfare, and in the American supply chain today there are dozens of companies, many being backed by billions of dollars, trying to innovate. Individually their demand is immaterial; the entire American drone industry would still be materially smaller than just our GM business today, though that will change over the next five to ten years. We have a unique position and a duty to work with everyone to coordinate and to standardize magnetic grades around the Department of Defense preferred grades that we are going to be producing at 10X. We are taking the lead in helping coordinate so American innovators know the supply chain will be there for them and that MP will be there for them. Before we, tongue in cheek, sell out the whole facility, I want to make sure instruments of warfare and national security are taken care of. That was some of the thinking behind it. This is already underway, we have a number of companies signed up, and that should provide fruitful opportunities as we grow our business.
Our next question comes from Max Yerrill with BMO.
Why don't we skip Max and come back to him?
No problem. Your next question will come from Brian Lee with Goldman Sachs & Co.
I have a two-part question, so I'll just ask it all at once. On this new offtake for gadolinium, congrats on that. Just maybe high-level sense of capacity for more heavies offtakes. Just what are the other heavies you could see offtakes on, where are you having the most engagement today? And then secondarily, how to think about those and the economics for those in the context of the nine-digit type deal here you're announcing for gadolinium specifically?
It's Ryan. On that front, I mentioned, obviously, that we are underway on the samarium program that Michael gave an update on. And so that is certainly an area where we intend to continue to commercialize that business and respond to the demand that we're seeing in that space. Certainly, I think that there is opportunity for follow-on volume beyond this existing contract on the gadolinium side. There are a number of critical use cases for these products. And it's interesting to see what's going on in the market today. You're seeing large aerospace companies announce difficulties in their supply chain from what they explained is very tiny parts. And I think the reality is it speaks to how critical some of these materials are, powering hundreds of millions and billions of dollars of value downstream of them. And so we expect to continue to see pretty exciting growth opportunities just within that element. I mean you've got the periodic table, so you know all the other elements that are in the ore body. But certainly, we think yttrium is another opportunity set. We will be producing yttrium product and are looking at different ways to maximize the value of that output from the ore body as well. So certainly more to come on that front.
And let me just add one more thing. I want to hit on what Ryan just said because I think it's really important. There are no heavies getting out of China or very limited and magnets are on a licensing basis. And we are in a regime right now of controlled scarcity. So people are sort of getting fed just in time. And what that's actually creating, and we're seeing this behind the scenes with many companies that we talk to, is there's a lot of concern. I mean there's disruption in the supply chain. Obviously, AI is getting all the headlines. But if you look through, and maybe in the coming days, there'll be some reporting or some analyst reports on this, but if you look through the industrial supply chain, particularly in aerospace, we are seeing real disruption. It's not full-on panic yet, but it's real disruption from allocations that have to happen due to scarcity. And so I do think that's going to open up. And obviously, we see it here at the beginning of it, but that's going to really open up some interesting opportunities for us. And it's also something that we need to pay attention to because uneasy detente is not necessarily a condition where we can just sort of be relaxed in the supply chain. It's still very challenging out there.
Our next question comes from Max Yerrill with BMO.
I think this works now. So very fitting, thanks as always. With the recent U.S. government announcement and then banning the export of magnet scrap, is this changing how you're thinking about developing recycling capacity? And have you seen any new customer inquiries into potentially adding more magnet recycling capacity?
It's Michael. I think recycling has been a part of our vertically integrated strategy for some time. Obviously, we announced the agreement with Apple last year. But this has been kind of part of a challenge throughout the world, which is shipment of critical minerals or byproducts in magnet and also battery supply chains have been challenging, and it creates a problem of supply availability. Now recycling is not just doing the processing, it's also the collection and the aggregation, pre-processing removal from other parts of the assemblies. But this will just highlight the importance of the work that we're doing. We've definitely seen a lot of interest in recycling. Our primary focus is dealing with the process waste from our Independence and 10X in supporting Apple, but we are looking at scaling that business in line with the market conditions.
Our next question comes from Richard Garchitorena with Barclays.
Congratulations on all the progress. My first question is on the commissioning of the Dy Tb circuit that's underway. Is that basically going to be incrementally adding any costs for the second half of this year? You also had semi-annual maintenance in April. I was wondering if that had any impact on cost this quarter. So really, it's a function of how much do you think costs could potentially improve in the second half?
It's Ryan. I'll take that. As it relates to the heavy rare earth circuit, certainly, I think we've talked about investments that are apparent in the P&L right now. You mentioned two of the most critical ones, the maintenance outage and staffing ahead of heavy rare earth production. If you look at how that will take shape over the course of the rest of the year from a heavy earth perspective on dysprosium and terbium, that will make its way into inventory and then find its way down to Independence and ultimately, we'll recognize the value of those products through magnet sales. And so once we get into sort of full-scale commercial production and we are inventorying those costs, that will come out of the P&L until we ultimately recognize the magnet sale. But in terms of what I think you're getting at on overall cost position in the business, I think we feel increasingly confident that the path to lowering our cost structure is very clear.
I think we've said consistently that we need to be operating consistently at our target production levels, and that will give us the benefit of the fixed cost absorption math that we've walked through previously. Beyond that, we see pretty clear opportunities to improve process efficiency, reduce maintenance intensity. And then certainly, as we've talked about, we expect some pretty tangible benefits from bringing chlor-alkali online. In terms of timing of those, we expect those benefits to build progressively through '27 as we consistently produce at a more targeted throughput.
Great. As a follow-up and on the bigger picture, congratulations again on signing the long-term offtake for gadolinium. In the prepared remarks you said demand continues to increase, so should we expect a stronger cadence of new contracts and announcements? Are negotiations picking up? Are you getting more inbound incremental demand for capacity that would suggest you’ll need to expand from here?
Well, one thing I would say is we covered this quite a bit on the last call, and I think we'll continue to cover it over coming quarters. I remain convinced that NdPr is the binding constraint. Looking around the world today, we see a lot of magnet facilities intending to come online and a number of groups investing and trying to put things together. When we talk to downstream companies and look at the markets, there are a number of verticals, whether it's magnetics or, as you referenced at the beginning of the question, heavies. It goes back to the point I made about controlled scarcity, which is the state of the world right now, and that is not acceptable. As we referenced earlier, in the aerospace industry today, for example, Honeywell Aerospace lost a quarter of their value on a call in which they referenced $15 million upstream in the supply chain. When a company can lose $15 million of market cap over $10 million or $15 million of upstream supply from a supplier to one of their suppliers, that shows the extent of the problem.
So, long story short, this applies to every vertical, including the heavies. In magnets, which represent the vast majority of our business, I think NdPr is a binding constraint for the foreseeable future. I referenced this with robotics and try to temper expectations because nobody knows when or how these things will come online. Take AI and memory as an example: when ChatGPT hit the market, Micron had a $50 billion enterprise value; three years later, people woke up to a dramatic memory squeeze and it's $1 trillion now. These are very different industries, but similar dynamics could occur as more physical AI use cases come online. I don't know which will happen first, but that's the kind of thing we're seeing.
Our next question comes from Corinne Blanchard with Deutsche Bank.
I would say most of my questions have probably been answered, but maybe we can go back to the quarter itself and your view going into the third quarter. I think you had a somewhat higher-than-expected Material segment performance this quarter, which did impact costs a bit. Can you talk about how we should think about that going into the third and fourth quarters?
Corinne, it's Ryan. I think from a sales perspective, I think sort of dovetailing off of what Jim said, certainly, demand for NdPr remains extremely strong. I think we were fortunate to be able to continue to ramp up available capacity for metallization and things like that to continue the cadence of sales within Q2. I mentioned in my prepared remarks, likely a flattish volume sequentially. A lot of that, of course, really depends on shipment timing, lead times for metallization, and things of that nature. So it is always a bit lumpy, but that's generally what we're seeing from a sequential performance perspective. We've talked in the past about the fact that as we scale production, ultimately, we will continue to build the ultimate tonnage of product within the channel, given the fact that we have multiple outlets to market. And so you should expect as we grow production over the next several quarters, eventually, we will need to fill that channel back up to support the higher volume levels, but that's generally what we're seeing in the short term.
And maybe going back to the China export ban. Do you expect any maybe impact on the reagent or like cost coming from the export ban list? Or do you expect a very minimal impact?
From our perspective, we expect minimal impact given everything you know about us, I don't think any of this came as a shock probably to us or to anyone out there. And so we've been thoughtfully preparing our supply chain to be resilient for a very, very long time. And so the team has done an excellent job on sourcing there. So we don't see any immediate impact.
Our next question comes from Carlos De Alba with MS.
Good to see the progress that you're making. On GM, encouraging to know that the initial commercial magnet deliveries will start later in the year. Just wanted to see if you can provide any color from what you have been hearing from them regarding the early qualification and testing that they may have already done with your magnets.
Carlos, it's Ryan. We're overall extremely pleased with the progress we've been making with General Motors and with our engagement with them. I think it's important that folks understand the qualification process here is not about whether you're making a magnet to spec. That's a tiny piece of it. It's about staging capacity as we ramp and then versus the needs of the individual motor plants. It's ensuring batch traceability and quality systems of ours are integrated with our customer systems. And then certainly, kind of to your point, it's about having our customer observe, ultimately, the impact to the overall systems across the vehicle when they do a part swap. And so that is a long and painstaking process, but the results that we've been seeing are extremely encouraging. And so as we reiterated, our current expectation is to begin regular production deliveries sometime in the fourth quarter.
All right. Okay. Good. And then maybe, Michael, I was intrigued by the planned reagent trial that you guys did. Can you maybe provide more color, particularly on the benefit, the potential increase in cost that you mentioned, and the timing of deployment?
We regularly do the trials of different reagents to ensure resiliency and flexibility. This quarter is probably a bigger one than we've done in some time. I would say, as you know, one of the things that we pride ourselves on is we recycle all of the water in our flotation process from our tailings. So preserving the quality of that is an important consideration. We do expect to make a change in our reagents later this year. The direct cost of the reagent is somewhat higher than our legacy product, but we think the overall benefits outweigh that. And we're looking forward to the change. Overall, we're positive on that change and that the flotation results will be excellent.
And maybe just to add up on that, this reagent supplier or reagent material that you're going to use are not from China whatsoever, right?
Correct.
Our next question comes from Bill Peterson with JPMorgan.
Can you hear me? Nice job on the quarterly execution. Understanding that you expect NdPr to be the long-term bottleneck as you've discussed many times. But overlaying now with the, I guess, tightness of really multiple materials in the near term that you also described, you have your SEG, which can address some of the materials, but how does that inform your expectations of procuring other heavies that may be in short supply given the export restrictions? Are you still evaluating acquiring other assets or upsizing recycling efforts, which was something that was mentioned in the prior question?
It's Michael. Thanks for the question. I think what we've been saying for some time is that we've built a heavy rare earth separation circuit that has the ability to process third-party feedstocks, and we also have a site that is capable of handling feedstocks of different type and purity. We think that gives us a lot of flexibility. Certainly, terbium and dysprosium have been the focus for obvious reasons, but we expect to bring in other heavies with that basket. And we've designed for a certain mix of different samarium, gadolinium, terbium, yttrium, et cetera. And to the extent these are valuable and wanted by the market, we're looking at ways to process those.
As far as overall heavies, I just want to stress that we've made remarkable strides in reducing heavies needed as we've advanced our intellectual property and our manufacturing processes and expertise. What I would also say is that the big demand use cases in the industry are essentially, if not completely, no heavy; the vast majority of demand is no heavy. By that, I mean, for example, robotics would be one, disk drives are another, and there are a number of use cases. I'm not going to say 100% because we will do some national security‑oriented items, and we've talked about drones. But I think that by the time 10X comes online, the vast majority of that facility will be no heavies or very limited heavies. Obviously anything can change, and we're flexible and prepared to adapt. We do see a variety of feedstock opportunities around the world. I don't want you to come away thinking we're not concerned about everything, because we've been around long enough to know things can change quickly.
To the extent this is being marketed as a reason not to invest or as a binding constraint, I go back to the point that if you want to make rare earth magnets for the vast majority of demand use cases, particularly the ones that will be attractive margin business, it's about your ability to create a scaled factory with precision manufacturing and strong intellectual property, and it's likely to be no heavy, at least from an MP standpoint.
Yes. That's actually the lead into the next question. You mentioned earlier the Grain Boundary Diffusion and the low- or no-heavy magnet developments. Are there any milestones or data points you can share about how these magnets are performing compared with conventional magnets? I think that would be helpful for investors and would allow us to measure your progress on these developments.
I think magnets are produced to meet certain performance requirements and specifications. And so our products are meeting and exceeding the specifications of our customer and the requirements, not just for magnetic performance, but also temperature performance, corrosion, other factors are considered in that. I think we're really proud of the quality of what we're producing, and we're waiting for additional qualification. But to the extent the question is like the impact of GBD, it's not just GBD that's the factor. The design, the chemistry, the micro-structure, the grain alignment, all these things go into the performance of the magnet and those are the things that we've built a large team of 100-plus engineers and a lot of intellectual property to develop and to continue to develop. And so we're quite pleased with that.
Yes. And just hitting on that, I was just going to say, remember that, and Michael has referenced this, but customers don't buy a mix; customers aren't interested in a mix of what your formulas are. They just want you to hit a spec. And so to the extent that you can use a variety of processes, GBD, manufacturing, precision, et cetera, to improve how you can deliver that, that's really going to be the name of the game.
Our next question comes from Derick Ma with TD Cowen.
I appreciate the commentary on security of supply concerns from automotive, industrial, defense, and other potential counterparties, but we haven't yet seen an acceleration in new magnetics contracts. Why do you think that is? And what do you think needs to happen in the industry to turn those strong demand signals into firm contracts for Independence and 10X?
I'm sorry, maybe I'm confused about the premise of the question. Independence is fully sold out between GM and Apple, and it's possible we'll fit another customer or two in there. And 10X is 100% contracted with the Department of Defense. Now, as we start to bring that facility online, it's likely that we will end up contracting almost all of that capacity to industry as opposed to the Department of Defense. But maybe I'm misunderstanding your question — are you saying we're not contracted, or what exactly are you asking?
No, I guess those industrial and automotive and other contracts could take the place of the Department of Defense contract. And it's kind of a guarantee of EBITDA, but are you seeing the demand coming from those sources that could replace the contract in 10X, I guess, is what I'm asking?
Yes, this is Ryan. The level of activity and customer engagement is extremely high. What Jim is getting at is that earlier we were asked about the pace of announcements, and we are in no rush to announce a deal just for the sake of announcing a deal. We’re in a very enviable position where the value of the platform we deliver to customers is becoming more apparent every day, and their needs are growing more apparent every day. Given the security provided by the offtake agreement with the Department of Defense to invest aggressively and quickly, that does not mean we need to contract quickly in a way that does not maximize long-term value to the company. You’ve seen us do exactly this across every part of our business. We’ve known we had a gadolinium product available for sale for a very long time; you’re hearing us announce it today because we picked the right partner who provides the right risk-adjusted return on capital. You will see us continue to operate the same way we always have: announce something significant when it’s ready.
Our next question comes from Matt Summerville with D.A. Davidson.
Just a couple of quick ones. First, can you kind of talk through the puts and takes in magnetics revenue and EBITDA in the second half of the year? And how we should be thinking about the ultimate phasing of the commercial ramp over the course of 2027 to hit that initial 1,000 tons per year nameplate? And then I have a quick follow-up after.
It's Ryan again. I'll take that. I think we've tried to communicate that the ramp down in precursor product sales and the ramp up of magnet sales will inevitably be lumpy and nonlinear. A good example is this quarter: we began operating the commercial magnet production facilities for trial shipments and run-rate testing. If you look at the P&L, you saw a significant amount of overhead and labor and materials costs that are not yet inventoriable but are very typical of a start-up of this type of operation. Given the structure of our pricing arrangement for precursor products, many of those costs that previously were ascribable to metal production are now allocated to the magnet portions of the facility. Behind the scenes we had our best metal production quarter ever. What we've laid out is the beginning of commercial shipments of magnets in Q4, with a modest ramp of volume over time. As I mentioned earlier, we need to sequence those deliveries at different production cadences to align with demand at our customers' various production plants. We will learn more and have more to share as we get closer to the end of the year about the cadence for 2027.
And then just quickly as a follow-up. As I think about NdPr demand for just the U.S. defense complex, can you help frame what that looks like today and what it could look like say, over the next few years, if the administration sort of gets its way with its desired rearmament and incremental militarization is a function of kind of where they want to take the DOD budget, how significant that could be to NdPr demand, if there's a way to frame that?
Well, I'm sorry, that's classified. We could tell you but we have to kill you.
No, I mean, with defense demand currently, if you're looking at things like missiles, it's a small amount of demand. The key question is drones, for example: there are estimates, although it's hard to know because a lot of production is in China and Ukraine. Some estimates put drone production at around 12 million a year. If you do the math, we estimate that might equate to somewhere between 500 and 1,000 tons of magnet demand. It's not a huge amount relative to the industry, but it is essentially 100% in China, and that is certainly a dual-use technology. In fact, we saw some recent developments around drones this past week with the Chinese further banning exports. The takeaway is that if you look at demand today, it's relatively immaterial, but three to five years out it's going to be quite large, given that realistically MP is the only company that can satisfy that demand. That will be an area of very strict monitoring of what is sent out of China to support the American defense supply chain. This is part of the thinking around Swarm: we want to be early and ahead of it, help the industry standardize, and make sure they know we will be there for them. I think it will be a very attractive piece of business for us, but again, it's immaterial today.
Our last question comes from Ben Kallo with Baird.
I know we're short on time. So I'm just going to ask a big picture question. Throughout history, I think that in times of like extreme scarcity, there's always been innovation. I just want to understand what you guys are doing to make sure that you're ahead on that innovation side because it seems like the problem, like throughout the call, you've been stressing how big the problem is. It seems like the innovation will come in and help solve the problem. So what are you guys doing in terms of R&D or anything else?
Sure. I mean there's innovation, there's sort of different levels of that. There's innovation as far as getting your cost structure down, thrifting hard or expensive materials. And that is obviously something as we have been doing from the beginning with Independence and soon with 10X, where we've got an enormous team, and we are maniacal at pushing that forward. And I would say that I'm very proud of the team that we've assembled and the progress that we've made. We've talked about that quite a bit. So I think there's quite a bit of innovation happening there. And then I think if you're talking about sort of innovation as far as substitution, I mean, there's no question that people are always going to try to substitute expensive or hard-to-find things. I mean we witnessed this, you go back five or six years ago when the EV was on the rise, there was talk about people who were saying, "We're going to have no heavy rare earth-free magnets."
And of course, that sort of flamed out. It didn't really happen. There were some heavy thrifting, but it didn't happen. In fact, demand went quite a bit higher. Interestingly, with respect to robotics, you do not hear that at all. And I think one of the reasons is because when it comes to robotics, size, weight, torque density, these things really matter more so. In a big car, you can have a bigger magnet, a less efficient magnet. There's ways that you can compensate, you can make those cost trade-offs. But when it comes to some of these physical AI use cases, I think it's going to be that much harder to innovate, and that's probably one of the reasons why we don't hear a lot of that talk. But again, when things get scarce and hard, people are always going to try and there needs to be some. I mean, there's no question because the supply-demand imbalance is so large.
And I think we're also seeing us working with our customers to innovate and to customize or adapt our products to their needs and to what is available and what we can produce. I think the fact that we'll have a domestic supply chain for the first time in a long time gives unique opportunities for that kind of innovation.
And on that point, one last thing we don't talk much about. Given the team we've built and our thinking about magnetic formulas and how we do things, these things are never static, right? There are different things that come and go; everything is cyclical. The way you make a magnet today may be very different than how you make it three years from now because different materials may be scarce. We have done a lot of work around building the capability to make sure that we are being thoughtful about how we're making magnets and also about building the capability to make magnets so that we can evolve over time as the market evolves. I think that's going to be a key thing. If you think the world is just going to be static and it's like I got to get X of this and Y of that, by the time that comes to fruition things may have totally changed or they may not. You've got to be in a position to adapt quickly. Our magnetics team has been doing that for years, and I think we have pretty extraordinary capability on that front.
That concludes the question-and-answer portion of today's call. I will now hand the call back to Mr. Litinsky for closing remarks.
Okay. Thank you. This was a really solid quarter of execution. A lot is going on, both at Mountain Pass and in Texas. And a little bit of breaking news. During the call, I got a photo. We are now officially vertical on our site in for 10X. So we are moving very quickly on construction there, and we will get back to work and see you next quarter.