MP Materials (NYSE: MP) soared 43% today. The stock is up 171% on the year.
We’ll explain why in a moment. But first we must set the stage.
If you aren’t familiar with the rare earths story yet, it’s time to catch up.
MP is one of the only rare earth miners in the United States. They also refine, separate, and manufacture the powerful magnets created using these key elements.
These minerals, and the magnets made with them, are in practically every high-tech product today. Cell phones, semiconductors, electric motors, batteries, lasers, weapon systems, and more.
Currently, China has a near-monopoly on many of the most important rare earth elements (REEs).
China and Chairman Xi are using rare earths as powerful leverage in the ongoing trade war with the U.S.
Now the Pentagon is stepping in and getting directly involved in the rare earth business. It makes sense, because currently, our defense companies rely on Chinese rare earths to build weapon systems. This is untenable.
The Pentagon Catalyst
So why did MP Materials pop 46% today? Well, this morning the Department of Defense (DOD) announced a major investment in MP.
The DOD will invest $400 million into preferred shares of MP. That will give Uncle Sam a roughly 15% stake in the firm. The government will also receive stock warrants (the right to purchase more shares at a set price). As part of the deal, the government will guarantee a minimum price for MP’s mined materials.
The government will also assist MP Materials with building a second magnet manufacturing facility in Texas.
This is a highly unusual move. It’s not every day that the Pentagon invests in a publicly-traded miner.
But these are unusual times. Currently the world depends heavily on China to supply rare earth elements. This is unacceptable, because it gives China an incredibly powerful tool to leverage in the trade war.
This is why the government is getting involved in the rare earth sector. In fact, we guessed that something like this would happen last month in A Heavy Rare Earth Investment Idea:
America and the broader West must focus on building rare earth self-sufficiency.
Historically this has been challenging, because China has become such a dominant force in the industry. Whenever someone outside China attempts to get a mine and refining operation going, Chinese companies flood the market with supply.
This crashes the price of rare earths and ruins the new project’s economics.
So to get out of this hole, America and other governments are going to have to subsidize and incentivize the rare earth industry. It’s going to take billions of dollars to properly kickstart.
In that article, I covered another interesting rare earth stock, Lynas Rare Earths (LYSDY). Lynas is up around 10% today on the MP Materials news. It is possible that the government could invest in Lynas and other rare earth producers in the future. Although Lynas is an Australian firm, with operations in Malaysia, so that may complicate things.
I will continue to watch MP Materials, Lynas, and other rare earth miners. It’s becoming clear that this is a sector that we can no longer ignore. Without REEs, the modern technological world cannot function.
Today China has a vice grip on the industry. This is now set to change. It will take time to build up our REE operations, but the investment will be well worth it.
I suspect the government is just getting started in its efforts to boost the rare earth business. Going forward, I fully expect more investment, subsidies, and permitting help.
It’s time to get the American natural resource sector firing on all cylinders. Today’s news is a nice start.
