MP Materials: Pentagon Backing vs. Tariff Headwinds in the Rare Earth Race

The U.S. rare earth supply chain has long been a geopolitical battleground, and MP Materials (NYSE: MP) stands at its epicenter. The Pentagon's $400 million investment in the company—positioning it as the largest shareholder—and a landmark magnet manufacturing deal mark a pivotal shift in national security strategy. Yet, MP's path to dominance remains fraught with risks tied to trade tensions and rare earth geopolitics. Here's why investors should pay close attention.

The Pentagon Deal: A Strategic Masterstroke

The Department of Defense's partnership with MP is not just financial—it's a geopolitical lifeline. The $400 million preferred stock purchase and $150 million loan to expand separation capacity at Mountain Pass directly address China's near-total control of rare earth processing (91% of global capacity). The crown jewel of the deal is the 10X Facility, a magnet plant set to produce 10,000 metric tons annually by 2028. Backed by a 10-year offtake agreement guaranteeing 100% Pentagon purchases of magnets, MP gains stability in an otherwise volatile market.

The price floor of $110/kg for NdPr oxide (versus China's spot price of under $60/kg) is a game-changer. This modified contract-for-difference shields MP from Chinese price suppression while sharing upside profits with the DoD. With MP's market cap surging to $7.4 billion post-announcement, the deal's immediate financial impact is clear.

Tariff Traps: China's Retaliation and MP's Pivot

The U.S. tariffs on Chinese imports and Beijing's countermeasures have reshaped MP's supply chain. In 2023, MP halted shipments of rare earth concentrate to China—once a key revenue stream—due to 125% retaliatory tariffs, which made exporting unviable. This forced a rapid pivot to domestic refining and sales to Japan, South Korea, and U.S. manufacturers.

The heavy rare earth (HREE) challenge looms largest. Mountain Pass's light rare earth-rich deposits mean MP must source HREEs like terbium and dysprosium externally. While the Pentagon's loan supports separation upgrades, MP still depends on foreign feedstock—potentially from Brazil or Vietnam—where U.S. tariffs could complicate logistics.

Risks: Geopolitics and Market Volatility

1. HREE Supply Bottlenecks: China's dominance in HREEs (90% of global processing) and its export controls have driven prices for terbium and dysprosium up 195% and 168%, respectively, since April 2025. MP's ability to secure affordable HREE feedstock without violating trade restrictions will test its growth.
2. Competitive Pressures: Chinese and Japanese producers still dominate magnet manufacturing costs. MP's guaranteed Pentagon prices may not translate to competitiveness in commercial markets.
3. Trade Policy Uncertainty: While the DoD partnership shields MP from near-term risks, broader U.S.-China tensions could reignite tariff disputes.

Investment Thesis: Strategic Play with Caveats

Buy: MP's Pentagon deal solidifies its role as the U.S. government's preferred rare earth partner. The offtake agreement and price floor provide a $140 million/year EBITDA floor, making MP a low-risk bet for long-term investors. The 10X Facility's magnet production timeline (2028) aligns with rising demand for EVs and defense systems.

Caution: HREE sourcing and competition remain wild cards. Investors should monitor MP's progress in securing HREE feedstock and its magnet pricing in commercial markets. A $110/kg price floor is a safety net, but if global NdPr prices stay depressed, MP's margins could thin.

Conclusion

MP Materials is the linchpin of U.S. rare earth independence—a strategic asset with Pentagon backing. While tariff risks and HREE dependency introduce volatility, the company's guaranteed contracts and price stability make it a compelling play on decoupling from China's supply chains. Investors seeking exposure to critical minerals and national security equities should take a position—but keep a close eye on geopolitical winds.

The rare earth race isn't just about mining; it's about outmaneuvering the world's most resourceful competitor. MP has a head start, but the finish line is still in sight.