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Rare Earths Sector Sees Major Upswing with Pentagon Investment in MP Materials
On Thursday night, the rare earths sector celebrated a significant milestone as the US Department of Defence made a groundbreaking purchase of US$400 million in shares from MP Materials, a leading rare earth miner outside China. This marked a pivotal moment, as MP Materials is known for operating the Mountain Pass mine in California, the only active rare earth mine in the United States.
This announcement reverberated through the market, prompting local stocks such as Lynas and Iluka Resources to surge over 15% on Friday.
Understanding the Strategic Landscape
The US Geological Survey reported that approximately 70% of US rare earth imports originated from China in 2023. Amid escalating trade disputes, China previously imposed export limitations on seven crucial rare earth elements vital for high-tech industries, including electric vehicles, advanced weaponry, and robotics.
These export restrictions have significantly disrupted production across numerous sectors in Europe and the US. Key developments include:
- Ford’s CEO confirmed that a shortage of rare earths led to factory closures.
- Tesla’s advancement of its Optimus humanoid robot was hindered due to shortages exacerbated by China’s policies.
- Warnings of widespread factory shutdowns emerged in response to China’s rare earth ban.
- Defence contractors are feeling the pinch from China’s stranglehold on the supply chain.
MP Materials Experiences Rapid Growth
Following the Pentagon’s announcement, shares in MP Materials soared by 50%, reaching heights reminiscent of the rare earth price peaks observed in 2022. Several crucial factors contributed to this remarkable stock performance:
Pentagon Investment Structure:
- The Pentagon acquired a newly formed class of preferred shares that can be converted into common stock, along with a warrant convertible at US$30.03 per share, valid for the next decade.
- This investment scenario would result in the Pentagon securing about 15% ownership of MP Materials.
- The Department of Defence committed to purchasing the entirety of magnets produced at MP Materials’ upcoming manufacturing facility, scheduled to commence operations in 2028.
Price Assurance Mechanism:
- The Pentagon has guaranteed a minimum price of US$110 per kilogram for neodymium-praseodymium oxide (NdPr) over the next ten years for stockpiled or sold commodities by MP Materials. Should market prices dip below this threshold, the Department will compensate the difference quarterly. Conversely, if NdPr prices exceed US$110, the Pentagon will receive 30% of the additional earnings.
Impacts on Rare Earth Stock Market
The Pentagon’s investment underlines the strategic importance of significant rare earth undertakings outside of China. Notably, the government’s willingness to offer US$110 per kilogram for NdPr—a rate double the current market price—indicates a potential paradigm shift in the sector.
Market Context:
- Lynas reported NdPr sales at US$53 per kilogram in the first quarter of 2025, showing only minor growth from the approximate US$40s witnessed throughout the previous fiscal year.
- During the peak of the rare earth market boom in February 2022, Lynas recorded NdPr prices of US$145 per kilogram.
- This situation signals a substantial opportunity for the broader ex-China rare earth industry, particularly if the US maintains this premium for the next decade.
Project Viability:
On Friday, Australian Strategic Materials (ASX: ASM) released results from a Scoping Study on the Dubbo Project, indicating that the project could become feasible at an NdPr price of US$87 per kilogram. This data implies that higher prices are essential for more speculative projects to thrive.
The Crucial Question: Can Others Tap into This Premium?
While this Pentagon investment is encouraging for the sector, the pressing concern lies in whether other companies can command similar higher prices for NdPr.
Lynas’ Contractual Limitations:
Lynas has an agreement with Japan’s Sojitz Corp, which allows for the supply of up to 7,200 tonnes of NdPr oxide annually, constituting about 70% of its overall production capacity. Analysts from Macquarie noted last month that while temporary price differentials could arise in volatile markets, the likelihood of Lynas achieving these prices is limited due to existing contracts. Consequently, Lynas’ product will be sold at prevailing market rates, eliminating potential profit margins.
DoD Connection:
Despite contractual restrictions, Lynas holds a multi-year contract with the Department of Defence to establish a large-scale domestic separation and processing facility for Heavy Rare Earth Elements (HREE). This facility aims to support both US and commercial clients and is expected to commence operations by FY26, sourcing feedstock from Lynas’ Mt Weld deposit and Kalgoorlie facility. Although this arrangement does not guarantee Pentagon investment on the scale afforded to MP Materials, Lynas is set to benefit from substantial funding to advance this initiative.
Conclusion
The Pentagon’s investment in MP Materials marks a transformative moment for the rare earths sector, showcasing the US government’s readiness to pay significantly for supply chain security. While rare earth stocks may respond optimistically to this news, the enduring impact will hinge on whether other producers can negotiate comparable pricing frameworks or gain from the larger market adjustments prompted by this substantial investment.
