All-In with Chamath, Jason, Sacks & Friedberg - #AIS: MP Materials CEO James Litinsky on rare earths, supply chain, and energy independence

Episode Date: May 31, 2022

This talk was recorded LIVE at the All-In Summit in Miami and included slides. To watch on YouTube, check out our All-In Summit playlist: https://bit.ly/aisytplaylist 0:00 Chamath intros MP Materials CEO James Litinsky 1:13 James gives a talk on supply chain, energy independence, acquiring the Mountain Pass mine and starting MP Materials 12:48 Bestie Q&A with James: US falling behind in rare earth mining, risk compliance, energy independence breeding geopolitical leverage, mining lithium in the ocean vs Earth's crust, and more Follow MP Materials: https://mobile.twitter.com/MPMaterials Follow the besties: https://twitter.com/chamath https://linktr.ee/calacanis https://twitter.com/DavidSacks https://twitter.com/friedberg Follow the pod: https://twitter.com/theallinpod https://linktr.ee/allinpodcast Intro Music Credit: https://rb.gy/tppkzl https://twitter.com/yung_spielburg Intro Video Credit: https://twitter.com/TheZachEffect

Okay, so I wanted to introduce somebody. This is an incredible story of a turnaround of a business that impacts a lot of Austin America, if you care about climate change, etc. His name is Jim Lytinsky and here's a guy who had all the success in the world running a hedge fund successfully. A business called Molly Corp goes into bankruptcy. He basically puts his entire fund in it, brings it out of bankruptcy, manages to build one of the first minds that was completely cleared. You heard what Elon said about California in California. That mine, some of these rare earths and critical metals that we need to make permanent magnets that we use

in electric motors. On the front lines of climate change, building factories now in South Carolina with GM, etc. etc. So, Jim's going to walk you through a few things and we're going to talk about some climate change stuff after. Hey everyone, so I'm Jim. I used to run a hedge fund and I'm now an accidental industrialist. So I want to take you through that journey. And then while I do that, it'll you know, we'll go through the problem that I'd like to solve. Just to provide some context. So I think if we think about a lot of the things that just came up with respect to the economy, it's been about a decade plus since the global financial crisis. And in that decade plus, we've been in this environment

where there's been essentially a full on boom, a lot of money printing and essentially a very low or negative cost of capital in growth in technology, right? And what we've seen now, I guess, we're on the beginning stages of the aftermath of experiencing that economic endomaima as was just discussed. But we have just been through this period of over a decade where there's been all of this money that has gone

to growth. And what has happened during that time, simultaneously, is the real economy has been starved. You haven't seen, I doubt many of you have friends that are investing in new steel mills, or aluminum mills, or nickel mines, maybe nickel mines now, right? But while the real economy has been starved, actually interestingly, we haven't noticed it so much, one because we're just starting to scale into electrification.

But China's made investments. So pretty much all of the incremental steel and aluminum and Commodity's capacity in the world over the last decade has come online because China has led the way. And as an aside, interestingly, about 80% of the aluminum and 80% of the steel production in China has done with coal. So not only have they sort of taken over the real stuff, and this isn't about wherever you are on the spectrum of, are they just a really tough competitor, or is this some kind of economic world war three, it doesn't matter.

What matters is that the incremental stuff in the real world has really, the way has been led by China. And so when we think about what's now happening in the world as we electrify, I want to move on to the next one here. I think one good thing about going after Elon is I don't have to really explain this chart. We are electrifying.

And as we electrify, what a lot of people might not fully understand is that while all this real stuff has come online, the Chinese have actually moved downstream, very intelligently. And so when we think about a lot of people may have heard of China 2025, but a lot of people probably haven't heard of China 2035, which is the current MO, which is to move downstream into standardization. And so actually when we look around the world today, four of the top 10 OEMs are Chinese by global battery electric share. And so when we think about the single largest private employer in the country of the auto industry,

we think about all these industries that are mineral intensive, the Chinese are actually have moved downstream. And these are very mineral intensive industries. So what this slide shows is, as we go from a fossil fuel world to an electrification world, which we all, I think everyone in this room believes, is fake complete. And this actually excludes steel and aluminum, just in the content of copper, nickel, lithium, and then what I focus on, rare earths, and some of these other things, there's seven times as much content. And so when we think about the past of the fossil fuel driving, geopolitical, gamesmanship, and power in the world, the future is about minerals. And what I focus on are rare earths.

And so we, and I'm gonna get to my journey as an accidental industrials in a minute, but what you can see here is rare earths, they're kind of the way to think about it is sort of like a young cousin of semiconductors to the EV business. So regardless of how electrification happens, regardless of battery chemistry, how that energy gets to a motor,

that motor moves via magnets. And so this industry is expected to explode. And it's not just EVs, it's wind turbines, drones, robots. Can anyone actually guess where this robot is from? This is actually from Short Circuit, Johnny number five, but I'm hoping Elon will get us a better robot of the future. But when we think about all these industries, magnetics, it's really powerful. So that's where I'm focused.

And this is just an example of the commodity needs as we electrify. If we take those projections of what's going to happen in electrification just in my space. So this is NDPR. This is the stuff that we make, the input into magnetics. You can see there's a huge deficit that is looming. And just moving on, look at my space.

Here's the challenge. So outside of us, this entire supply chain is essentially domiciled in China. And it doesn't even have to be nefarious, but what happens when the largest manufacturers in the world are all competing for what I showed you in that prior slide, a shortage of supply. And we've seen lots of headlines whether it's the semiconductor issue or, you know, just today there was a headline that Rivian is fighting with a supplier over

seat costs. You know, all of these things where we're seeing the shortages and the supply chain that are flowing through. If there's an allocation of materials and the materials are controlled by China or another geopolitical rival, which downstream businesses do we think are going to get those materials? This is actually now an existential issue for all of us. Back to my story. This is Malimpass.

This is the mind, Jamoth mentioned that we bought this at a bankruptcy in my fund. So going back about five years ago, this site went bankrupt. It was a public company. It sort of rose and then it fell. And nobody believed that we could compete against China. And in fact, I had to, we showed up in the Delaware Courthouse Steps.

I mean, it was literally like out of a movie that were other creditors pushing to send this thing into bankruptcy. And you look at this thing, you're like, wait, this is one of the most valuable rare earth materials, mines in the world. And this is the future, this is a material for electrification and no one wants it.

Not only does no one want it But people think that actually we can't even produce here economically because the Chinese have taken over the industry And so we actually kicked in a couple million dollars just to keep it in care maintenance just to keep the eight employees Onside going so that this thing could actually keep its permit through the bankruptcy because otherwise they were just gonna raise it to the ground so we we went through that journey and we ended up buying it. So these assets, this is about two billion dollars of replacement cost, not to mention the fact that this is one of the marquee sites in the world and it's an established jurisdiction. All of these assets up over here to the left, these are what make it environmentally

friendly so we don't put anything back into the water supply, we have dry tailings, which essentially means that for sure we're the cleanest rare operation in the world. If you go on to YouTube you can kind of see how historically some of that mining and processing is done. But no one wanted it. And everyone thought that this couldn't be done. But we bought it at a bankruptcy. We took on, it was sort of a distress turn around, and started at the same time. We had no accounting software. We literally had eight people in a mine,

and I show up on my hedge fund manager. And people thought I was pretty insane. And probably if I knew what I was getting into, like I said, it was an accident. But I couldn't believe that no one else wanted to do this. And I frankly, I felt as an American, somebody had to do this. And there I was on the courthouse steps. And so I went for it. And fast forward to today.

And we're now public. We went, as Trimoff mentioned, we went public a couple years ago or a $6.5 billion market cap. It's been, you know, obviously a massive thank you. So this has been a massive home run for myself and my investors, but more importantly, I, and I don't belittle that. Ultimately we're capitalists here. We want to do a great job for our clients and ourselves. But I hope that we can kind of contextualize this for what needs to happen throughout our

economy because I do think that as painful as the adjustment may be, that we're now in this period that we're about to be in with some of the, as the capital comes out of the growth space, there is going to be a big, beautiful, bull market in real stuff. And it is just beginning, and I'll give some statistics with the besties, I don't want to ruin my besties time, so I'm going to finish up real quick. But there is a lot of stuff that needs to get built,

and this supply chain stuff is existential. And so what we're doing at MP, you can see our stage one, we're doing, we just reported our quarter a couple weeks ago, we're now from a site four years ago that I had to beg on the courthouse steps just to keep it alive. We're now doing approximately 450 million of run rate EBITDA today. So you know, and then we announced the deal, we announced the deal with GM where actually have already broken ground at a magnetic facility in Fort Worth, Texas, and this is a scale deal. It's not exclusive.

We expect to bring in other OEMs. We'll be making magnets, so we'll be shipping material that will be environmentally produced from Mount Pass, California, over to our site in Fort Worth and make magnetics. Our goal is to build a Western magnetics champion. And so I guess with all of that, I would say hopefully this kind of thing can inspire you. We need, the good news is there needs to be a lot more stuff like this, maybe I'll share some stats on some of the other space

because I don't want to make this just about rare earths. But when we think about all the materials that we need for this electrification boom and the supply chain that needs to be built, this is like, this is the era of, it's as if, it's, you know, the 19 teens, and Ford is just out. I mean, there is an entire supply chain, and it's not just EVs, it's wind turbines, it's drones, it's robots, and it needs to be a bunch of real stuff

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

Tesla and their quarterly earnings had something to do the effect of, you know, we are going to consider becoming a mining company as well. Right? And then I think Elon said something on the earnings call, which I thought was really interesting. He's like, I encourage every entrepreneur out there to get into lithium. Please, you know, become a Lithium miner, right? So maybe if you can, just quantify for us,

and you showed the gap for your, for NDPR, but broadly speaking, Lithium and all the other things that we need to actually electrify and get to a reasonable place in climate change. How behind the curve are we really? So it's a great question and the data is tough because a lot of it is reliant on battery chemistry. And so we don't know exactly how much nickel it'll be, you know, but we do know certainly

lithium, nickel, copper, all of these things. It's multiple. So we need, here's actually, maybe this is a great stat. Some good source that I utilize estimated that we probably need on the order of 40 to 50 copper and nickel projects over the next couple decades. So call it roughly $200 billion of CAPEX to satisfy the demand for electrification that we have over the next couple decades. And what's so interesting you mentioned, and obviously I assume Elon sees this, is if you look at the multiples,

you know, just think about it from a strict investor point of view, from a financial arbitrage standpoint. Look at the multiples of where auto OEMs trade, or you know, certainly Tesla, and then look at what's happening in the mining industry today. So actually the nickel industry is dominated by essentially Glencore and Valle. Those two businesses, and I'm not, you know certainly Tesla and then look at what's happening in the mining industry today so so actually the nickel industry is dominated by essentially Glencore and

Vale. Those two businesses and I'm not you know I'm not pitching stocks but as an investor you know we'll see with the next panel those two businesses right now at today's commodities prices are essentially going to free cash for themselves out in three years. Time to buy them stock. And they're buying back stock right and so this is how how stark the arbitrage is that in the real economy, mining in materials companies, steel companies are trading a double digit free cash for yields. They're buying back stock, they have no leverage in their businesses, and then downstream, everyone's relying on them, and upstream, these guys, they don't want to spend to build

out new capacity because the cost of capital is too high. So what's going to happen is I think you're going to see maybe an AOL time Warner moment and I don't mean it the negative way but I think you could see a Tesla or someone like that buy upstream into these industries because ultimately downstream they all realize that the real stuff is in shortage and you can't have the enterprise value downstream because it's like musical chairs. How much of your night when you're sleeping do you think there's an X percent chance I'm going to have some huge environmental catastrophe. Like part of I think How much of your night when you're sleeping do you think there's an x% chance? I'm gonna have some huge

Environmental catastrophe like part of I think why a lot of folks, you know folks like this who could probably go into that business Don't is in the back of their mind. They think man. This is like this is a lot of Narlie stuff if something goes wrong. How do you manage that risk and how big is that risk if we try to do this in America? So the single most important thing we do at MP is safety. And we actually, in our last earnings call said, last two years, we've had two years without a lost time injury and we gave everybody, every single employee,

in the company, a cash bonus, to celebrate that milestone, which is really critical. The reality is this isn't software, right? It's real stuff. All we can do is our best. I just think, I think, frankly, as a human being, as an American, I would rather have minds being done in America, eating in the state of California,

over elsewhere in the world, where I certainly know that, I assure you that nickel mining in Russia is not as environmentally friendly as it is in Canada. Well, I think most people may or may not know this, but for example, all of the, you know, cobalt that goes into a lot of these EVs, a lot of it comes from DRC. And if you go and see the state of governance in DRC, women's rights in DRC, child rights in DRC, they're not existed. And so it is a very, very complicated, dirty supply chain that feeds the beast. And even though you may think you're doing the right thing by, you know, driving this

plug-in hybrid or, you know, your Toyota Prius, if you trace that stuff back, it's a really complicated place that's- And I think we've all gotten a big education on supply chain over the last two years with COVID. And the value may be of redundancy. And what happens if you give a dictator a little too much power? The Germans are learning a hard lesson

about what happens when you shut down nuclear reactors and decide, hey, let's buy our energy from Putin. And so it's a great point you raised about the Germans because I think it's a fair analogy to say that Germany is to that gas as we are to China supply chain. And so we see this coming, right? We see, and again, this is, this speaks to geopolitical leverage. This is a national security issue. It's a national security issue. It's a democracy issue. Is it a war issue?

Is it something that gets to the point where we would have to go to war? If, for example, we didn't get the natural resources and critical elements we need, not that you say that it could, not it would happen, but could it happen where it's so important that all these other countries can electrify and... Well, how about this, I'll make a prediction.

I'll bet that in the next five years, we will see a major household name OEM, failure need to bail out due to not, you know, prices went up on them, but lack of access to a material, some kind of critical material. Like you're talking a GM, a Ford, somebody. It's somebody, probably not GM. I mean, it's Shema, think about it.

Do we, if you think about it, Shema, do we need to even predict this? We went to a number of worse in the Middle East over oil. So if this is the new oil, and that is the analogy, it's clearly going to cause conflicts, and the question is, are we going to build a strategic reserve of these materials? Do we have a strategic reserve? We talked about the food supply problem,

and Freyburg educated us on, hey, we've got like 30 days of food, this country has 90 days of food. Do we need to have a strategic reserve of these where earth minerals and the natural states? Jason, I just don't think there'll be enough because when you think about this, we're talking about a multi-trillions of dollars a year to electrify across. The demand is so great. The demand is so great. We can't build up supply.

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

I understand that there's now been demonstrated significantly more lithium. Tell me if I'm off on this in the oceans than there is in the crust. There may be systems for extracting lithium from the oceans that are electrochemical in nature that will allow us to kind of access that resource. And obviously if you can get a system that can scale, you can get it all out very quickly. So have you looked into these systems, do you have a sense for the opportunity? Let me step back and then step down to that.

So investment styles are cyclical just like industries. I believe in cycles. The cure for high prices is high prices. There's no question in my mind whether it's that or there will be someone or frankly maybe someone in this audience will have some breakthrough. And so we will solve this problem. But the challenge is that I don't even think that we've ignited the proper focus and resources to actually solve this problem. That may be an example of a solution, but that'll take five to ten years. But in the meantime, there's a lot of resources that need to be applied to.

Adam Jonas, who is the auto analyst at Morgan Stanley, calls this the mother of all cat back cycles, I think, right? And I think his estimate was something like $3 trillion of CapEx needs to get spent over the next decade, even to have a fighting chance on all of this stuff. And so if you're looking at new areas, so take your NDPR MP materials hat off. But if you were in the same position you were back then now, not really, you don't need to go to the courthouse steps, but where would you be looking? Would you look at lithium, would you look at nickel, would you look at trying to do what,

trying to do and create better and simpler and cheaper chemistries for batteries? Where would you spend your time right now if you weren't doing MP? So I think you actually said it perfectly well in the lead-in, which is just anything that is real stuff. And so yeah, all of it, lithium, copper, nickel, steel, aluminum, all of these areas that have been starved. The cost of capital is just so high across the board that if you can come up with solutions to deliver the shortages, and again, I'm not saying the next three months, we could have a rural recession for six months, but we see the long-term

five, ten-year trend. I think anywhere you look in this space, you're looking in the right direction. It's a wind at your back, as opposed to, and again, I'm not, you know, taking a view, but to come up with a new cryptocurrency right now, it's a huge wind at your back relative to the headwind. Can you get your mind operational in today's political environment? Do you think, like, if you had to start from scratch, or if you found a new thing in Nevada, or wherever it is?

That's a great question. And that's the challenges that it takes to get any of these things. It takes a decade, right? It takes, if you have all the capital in place, all the human capital, all the, just the, you know, going through that process to build it, the materials cost. And so, could I do it?

I think the world needs it, and I think that what we do environmentally is so unique that I think we could get it done, but this is a big challenge, and I think frankly it's a, you guys were talking in the last session about, we need to come together. This is a the last session about we need to come together. This is a big time area where we need to come together. There should be a grand bargain, right?

There should be the environmentalist should say, OK, I accept that we need this stuff. I accept that we don't want it to be only made in Russia and China. And they should loosen up on some of the permitting stuff. And I think the people who are just like, you know, drill, drill, drill, drill, mind, mind, don't care, need to accept that we need to have really tough standards.

And I think we should have some kind of grand bargain. And it could be tax policy focused on it. But there needs to be some kind of coming together in our country to recognize that we need this time. Let's be intellectually honest. People are hypocrites. The people in the EU, people in the United States, they want the energy, they want to achieve,

they're complaining about the expense of, you know, even a modest increase in energy cost, 10%, 20%, which they could withstand, they will complain about it, and they will not allow fracking in their country, but they're more than willing to let Russia frack for it. They don't want the coal vaults coming out of the ground country, but they're more than willing to let Russia frack for it. They don't want the cobalt coming out of the ground in California, they're more than willing to let 15-year-olds dig it out of the ground

without a mass, eight-year-olds, as horrific as it is. And it's intellectually dishonest, it's hypocrisy, and I think we have to own the fact that we want to live in large houses, and we want to blow the air conditioner on some ridiculous setting. America's homes are three times bigger than other homes. So to build on this two very quick stories, there's a massive deposit of lithium in Nevada,

which would be enough to basically feed Tesla and another OEM. Okay? So this would get probably somewhere between one and one and a half million cars, pure electric on the road by 2030. So this would get probably somewhere between one and one and a half million cars pure electric on the road by 2030 and they were completely permitted by the BLM the Bureau of Land Management and there was a lawsuit that was filed and it's still wrangling its way through the federal court system and what it is is a claim that the there is an upper wood grouse that could be endangered through this mining. They have yet to find an actual upper wood grouse

in the area. But nothing can happen. Theoretically. And so the problem is that we've now delayed two years. It could get resolved this year, but it could be another two or three years, which means the lithium isn't actually available until 23. I mean, wrong form global warming continues to happen.

That's one story. Second story is that just yesterday, the California, the city of Costa Mesa, rejected a bid to build an electrolysis facility to create 100 million liters of clean water every single day. Just a diesel plant. The diesel plant, because they didn't want it. It's like going to lose some jellyfish or something. No, they just didn't want it. They thought, ah, it's unsightly. I don't want this in

Costa Mesa. And meanwhile, we're in a huge crowd. Pretty, it's a Costa Mesa. So, you know. And so, to your point, when the rubber meets the road, these unfortunate decisions get made. And there's no way to, you know, sort of, come talk to us. But these people wanna take 30 minute showers. I mean, that's the hypocrisy of it. If Americans really want to talk about

consular basketball, 30 minute, there's nothing wrong with a 30 minute shower. I wasn't calling you out specifically, but since you uncloaked yourself, it's gratuitous, in fact. It's completely gratuitous. And it's such a great point. And my entire argument is that we're going to, we will answer this question as a country,

either now or later. And the point about four of the 10 largest auto-eoms in the world are now Chinese companies. And so this is now a competitive issue. And so we can keep kicking the can, or we'll face the crisis. Are you the law's by the government? Are you beloved by, like, can you kind of, like,

be lying and just cut through the nonsense because of the government was like you well i think i think that it's fair to say that the the local officials are very happy with what we've done with what we've achieved in the in for worth Texas the the magnetic facility you know that we have some partnerships with the the president announced those the jim things in in Texas in Texas. In Texas. In Texas. So I think that there is frankly support from both sides of the aisle for what we're doing.

You know, there were executive orders on the rarest magnetics industry, specifically, both in the Trump administration and in the Biden administration. So I think what we're doing is hopefully nonpartisan. And frankly, I think all this should be. And that's, you you know the point about the grand bargain but even you raise a great point about just all of this stuff. It's you know there's so much pushback and we need to we need to figure out a way to get past that because this stuff has to has to get made.

I think it's incredible. I mean I'm a huge fan disclaimer I was also an investment. I am not an investor in company but we do appreciate you giving us the education and we do need to be independent from communist countries and really have the supply chain situation dialed in so I appreciate the hard work for America and for freedom. And I'm a huge fan of you guys, so thank you. We're like your winners ride Ringman David We open source it to the fans and they've just got crazy with I'm the west I just we know

Besties are gone, go thrifted That's my dog, you can't do it, I wish you're driveway So sex, we're gonna die Oh man, my hamlet has your room, we need to be at police station We should all just get a room and just have one big hug or something Because they're all just like this like sexual tension that we just need to release that How many? What your, beat, beat, what your, your, your, your, beat Beat, beat, what?

We need to get money. I'm doing all this. I'm doing all this. I'm doing all this.