Inside DoD and MP Materials' Critical Minerals Partnership

MP Materials, known for operating the only active rare earth mine in the US, is enhancing its relationship with Washington through a strategic deal with the Department of Defense (DoD).

The Pentagon is set to become MP’s largest shareholder, allocating financial resources to boost domestic processing and production of rare earth elements.

This manoeuvre underscores the increasing concerns within trade and defence sectors about reliance on Chinese minerals and the ongoing efforts to base these critical materials within US territory.

Reform in rare earths procurement and tariff concerns

Rare earths consist of 17 metals essential for producing magnets vital for technologies like electric vehicles, wind turbines, smartphones and military components, including submarines and jets.

Nevertheless, the US heavily depends on China for refining and processing these metals. In 2023, a substantial 70% of US rare earth imports originated from China, the US Geological Survey notes.

At MP’s Mountain Pass site in California, most output had traditionally been sent to China, with Chinese firm Shenghe Resources — partially state-owned — as a primary investor and customer. But, due to deteriorating US-China trade relations, especially under President Donald Trump's administration, this model is shifting.

Given Chinese export restrictions and US tariffs up to 145%, MP Materials stopped exporting to China, stating: “It was neither commercially viable nor in alignment with America’s national interests.”

This policy persists despite some tariff reductions.

China's dominance in the sector remains significant, controlling approximately 70% of mining and 90% of processing activities globally.

Accusations of price manipulation to uphold its supremacy have been common. In March, China ceased all rare earth exports amid trade disputes, triggering supply chain disruptions that caused production halts for some automotive manufacturers.

The US response, exemplified by agreements like this, is now materialising.

“We’re meeting an important national security requirement,” adds MP’s Founder and CEO James Litinsky. “However, we’re maintaining our free-market, publicly-traded company approach.”

The DoD's strategic financial steps

In a significant move, the Department of Defense will purchase US$400m worth of MP’s newly-created preferred stock, convertible to common shares, yielding the US government a 15% stake—exceeding holdings by Shenghe Resources and BlackRock Fund Advisors.

Furthermore, the DoD will receive warrants, enabling purchase rights at US$30.03 per share over the next decade.

The agreement assures a base price of US$110 per kilogram for neodymium-praseodymium oxide (NdPr), a compound essential for permanent magnet production, nearly doubling China's market price, which lingers around US$52 per kilogram.

Should market prices fall below US$110, the US government will absorb the difference quarterly. If they exceed US$110, the government will benefit from 30% of the profits, especially after MP’s second factory begins operations.

Ryan Castilloux, Managing Director of Adamas Intelligence, says: “This is a game changer for the ex-China industry and a much-needed surge in magnet production capacity.”

MP will invest an additional US$600m to enhance production and establish a second magnet manufacturing site, the '10X Facility,' with completion projected for 2028.

The DoD guarantees purchase of 100% of the magnets produced over the subsequent ten years, catering to both defence and commercial needs.

The funding is backed by a US$1bn loan from JPMorgan and Goldman Sachs, while MP anticipates a US$150m Pentagon loan within 30 days to bolster heavy rare earth separation capabilities at Mountain Pass.

James adds: “I want to be very clear, this is not a nationalisation. We remain a thriving public company. We now have a great new partner in our economically largest shareholder, DoD, but we still control our company. We control our destiny.”

Public-private partnership prospects

The collaboration signals substantial implications for the supply chain.

Historically, US rare earth sectors struggled to secure investments, partly due to Chinese price suppression. The price floor, DoD-backed agreements and equity stake signify an innovative public-private synergy.

The agreement, executed under the Defense Production Act—a Cold War-era measure to prioritise materials critical to national security—raises questions about ongoing Congressional funding, acknowledged by MP in filings.

Interior Secretary Doug Burgum hinted at replicating this model across other critical mineral sectors to mitigate foreign dependency.

The partnership's influence is already noticeable in financial markets, with MP’s shares surging nearly 50%, closing at US$45.23—their peak since April 2022.

The company's market capitalisation stands at US$7.4bn. While it's uncertain if the rest of the sector will follow, for now, MP is aligning its supply chain and procurement strategies with Washington’s industrial objectives.