MP Materials (MP), America’s prime source of rare earths ore and concentrate (a cocktail of all rare earths mixed together), has been in the headlines for three big reasons.
3 Reasons All Eyes Are on MP Materials
One is that it owns America’s only significant rare earths mine, can produce rare earth concentrate, and has some capability in producing rare earth oxides (separating the cocktail into specific rare earth oxides). In addition, it has plans to manufacture permanent magnets at its Ft. Worth, Texas, facility.
The second reason is that China, which dominates the production of both rare earths oxides and permanent magnets, has been restricting access to U.S. companies, thus creating negotiating leverage in U.S.-China trade talks and gaining concessions regarding access to advanced U.S. technology, such as Nvidia (NVDA)-powered advanced chips.
This leads to the third reason, which is the recent announcement that the Pentagon is making a big taxpayer financial commitment and ownership stake in MP Materials (MP). This was followed by Apple (APPL) announcing a $500 million partnership to produce recycled rare earth magnets at MP Materials’ Texas facility.
This sent MP stock soaring like a rocket.
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Before we get to the details and analysis of the above deal and my current advice on the stock, which I and the Cabot Explorer have recommended several times, a little foray into the history of this sector is required.
The History Behind America’s Rare Earths Shortage
First, that General Motors (GM) recently reported severe shortages of permanent magnets is one of the key reasons for the current permanent magnet discussion is ironic beyond belief.
The reason is that GM had it all and sold it all to China three decades ago.
GM’s wholly owned subsidiary Magnequench had a unique expertise in the manufacture of high-powered neodymium magnets, which it pioneered in the 1980s. In 1995, the company sold Magnequench, although it provided critical component parts to “precision guided munitions” that were then in great demand by the U.S. Department of Defense.
At that time, Magnequench supplied 85% of the world’s rare earth neodymium magnets.
GM sold Magnequench for $70 million primarily to two Chinese state-owned metals firms (combined 62% stake), San Huan New Material and China National Nonferrous Metals Import and Export Company (CNNMIEC). The chairman of San Huan, Mr. Zhang Hongson, was an in-law of former Chinese Premier Deng Xiaoping. CNNMIEC was, at the time, run by yet another Deng Xiaoping son-in-law. A coincidence, I guess.
Shortly after the Chinese took over, Magnequench’s neodymium-iron-boron magnet production line was duplicated in China, and it shut down the U.S. production in Indiana.
In 1997, the Magnequench shares held by the two Chinese firms were transferred to Onfem Holdings, a Chinese state-owned holding company based in Hong Kong and run at the time by a Mr. Wu Jianchang, yet another son-in-law of Deng Xiaoping.
The story becomes more painful since a few months later, in March 1998, Magnequench’s major U.S. supplier of rare earth oxides, Molycorp (then owned by Unocal, now MP Materials), was obliged to shut down operations by the U.S. Environmental Protection Agency (EPA).
This pretty much moved the whole rare earth supply chain to China.
In short, the Magnequench story painfully highlights a snapshot of the executive branch and Congress’s disregard for the health of the nation’s defense industrial base. The Pentagon advised against the sale but apparently could not stop it.
The Department of Defense’s Deal with MP Materials
Now, let’s return to the recent deals and attempt to decrease America’s dependence on China for rare earths and permanent magnets. Here are the broad points of the deal.
Following the construction of a second magnet manufacturing facility, the “10X Facility,” the Department of Defense (DoD) will ensure that defense and commercial customers will purchase all magnets produced by 10X.
MP Materials will receive a $150 million loan from the DoD to expand capacity at Mountain Pass and has received commitments from JPMorgan (JPM) and Goldman Sachs (GS) to provide $1 billion in financing for 10X.
In return for its support, the DoD will acquire $400 million in convertible stock, positioning itself to own 15% of the company.
The chief risk for those owning MP Materials stock is execution and technology risk, which is considerable according to the rare earth experts I talk to on a regular basis.
MP Materials now needs to execute on constructing facilities, which means incurring execution risk and securing financing before the 10X Facility begins commissioning in 2028.
Is MP Materials a Buy Now?
Bottom line, with no earnings, an uncertain China response, and significant execution risk, I strongly recommend taking some profits off the table now and waiting to buy new shares until the dust settles a bit.
I cannot resist ending with the hope that taxpayer support of MP Materials translates into any gains from the U.S. government’s ownership of shares going straight into the Social Security Trust Fund.
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