The U.S. Defense Department (Pentagon) is set to become the largest shareholder in rare earth miner MP Materials after agreeing to buy $400 million of its preferred stock. This announcement on Thursday marks a significant strategic step in the U.S. efforts to reduce its reliance on China for the supply chain of critical materials vital to national security. MP Materials shares surged more than 60% in premarket trading on the news, reflecting the market’s positive response to this rare and substantial government investment. MP Materials owns the only operational rare earth mine in the U.S. at Mountain Pass, California, approximately 60 miles outside Las Vegas. Proceeds from the Pentagon’s investment will be used to expand MP’s rare earths processing capacity and magnet production, which are key components in a range of military weapons systems, including F-35 warplanes, drones, and submarines.

According to the U.S. Geological Survey, the U.S. was almost entirely dependent on foreign countries for rare earths in 2023, with China accounting for about 70% of imports. Rare earths have been a central point of contention in recent trade disputes between the U.S. and China, and this dependency is perceived as a significant security risk. Interior Secretary Doug Burgum stated in April that the Trump administration was considering making direct equity investments in critical mineral companies to break U.S. dependence on China. James Litinsky, CEO of MP Materials, described the Pentagon investment as a “public-private partnership” that will accelerate the buildout of an end-to-end rare earth magnet supply chain in the U.S. “This initiative marks a decisive action by the Trump administration to accelerate American supply chain independence,” Litinsky said in a statement.

Building a Domestic Supply Chain: Investments, Production, and Guaranteed Purchase

The Pentagon is purchasing a newly created class of preferred shares convertible into MP Materials’ common stock, in addition to a warrant that allows the U.S. government to buy additional common stock. These convertible shares and the exercise of the common stock warrant would collectively amount to about a 15% stake in MP Materials as of July 9, nearly double the 8.61% held by Litinsky himself and the 8.27% held by BlackRock Fund Advisors, according to FactSet data. This acquisition solidifies the Pentagon’s position as the largest shareholder in the company, ensuring alignment of interests between the government and management.

MP Materials will build a second magnet manufacturing facility in the U.S. to serve both defense and commercial customers, with support from the Pentagon. The location of the new facility, named “10X,” was not disclosed, but it is expected to begin commissioning in 2028 and will bring MP Materials’ rare earth magnet manufacturing capacity to 10,000 metric tons. The Defense Department guarantees that 100% of the magnets produced at the new facility will be purchased by defense and commercial customers for 10 years after the plant is built. Additionally, the Pentagon will establish a 10-year price floor of $110 per kilogram for NdPr products (a rare earth compound used to make permanent magnets) that are stockpiled or sold by MP Materials. This purchase guarantee and price floor provide revenue stability and financial security to the company, crucial for the substantial capital investments required. JPMorgan and Goldman Sachs are providing $1 billion to help finance the manufacturing facility. MP Materials also expects to receive a $150 million loan from the Pentagon to expand its rare earth separation capabilities at Mountain Pass.

Strategic and Technological Importance: From Rare Earths to National Security

The Pentagon’s investment in MP Materials is a clear example of the broader U.S. efforts to secure its supply chain for critical materials, particularly those used in advanced technologies and military applications. U.S. reliance on China for rare earths, considered the “vitamins” of modern technology, is perceived as a significant strategic vulnerability. These metals are essential not only for fighter jets, drones, and submarines but also for civilian technologies like electric vehicles, wind turbines, and electronic devices. By establishing domestic mining, processing, and magnet manufacturing capabilities, the U.S. aims to reduce the risks of supply disruptions and minimize the ability of rival nations to leverage their dominance in these markets.

This public-private partnership underscores the recognition of the need for significant government investments to foster industrial development in areas of critical national security and economic importance, especially when the private market alone may be insufficient. The investments are also accompanied by regulatory and policy measures from the Trump administration, designed to bring manufacturing back to the U.S. and minimize external dependence, particularly on China. The success of such ventures will not only enhance U.S. national security but also create new jobs and contribute to economic growth in strategic sectors.

Implications for the Rare Earth Market and Global Competition

The Pentagon’s move is expected to significantly impact the global rare earth market. By increasing production and processing capacity in the U.S., it could introduce some competition to China’s existing dominance in the field. However, it’s important to remember that MP Materials’ scale of operations, even after these investments, is still relatively small compared to China’s global control. The success of the venture depends on MP Materials’ ability to meet production and operational targets, and the willingness of the U.S. government to continue supporting long-term investments in the sector.

For investors, the surge in MP Materials’ stock is testament to market confidence in the potential of strategic partnerships with the government, especially in areas considered vital for national security. However, shares in these companies can be volatile and are also influenced by changes in trade policy and geopolitical relations. The Pentagon’s investment sends a clear message to markets: the U.S. is determined to secure its rare earth supply and is willing to invest significant sums to achieve this, thereby reshaping the global supply chain.