Securing Rare Earth Dominance: MP Materials and the Pentagon's Strategic Play for U.S. Sovereignty

The U.S. military's reliance on rare earth elements (REEs) for everything from missile guidance systems to electric vehicle (EV) motors has long been a vulnerability. China's near-total control of the global REE processing market—91% of the supply chain—has left Washington scrambling to secure its own production. Enter MP Materials, the sole domestic producer of neodymium and praseodymium (NdPr), two critical rare earths used in permanent magnets. A landmark Pentagon partnership announced in July 2025 could be the turning point.

The Pentagon's Playbook: Equity, Loans, and Guaranteed Demand

The Department of Defense (DoD) is deploying a mix of carrots and sticks to fast-track MP Materials' expansion under the Defense Production Act (DPA). The $400 million equity investment—potentially rising to a 15% stake—pairs with $1.15 billion in loans to fund two critical projects:
1. A 10X Facility in Texas, set to produce 10,000 metric tons of magnets annually by 2028 (up from 3,000 today).
2. A $150 million upgrade to Mountain Pass, tripling its rare earth separation capacity and adding heavy rare earth (HREE) processing.

But the real game-changer is the 10-year price floor guarantee for NdPr at $110/kg—a doubling of current market rates. The DoD will subsidize any price drops below this threshold, while sharing 30% of profits if prices rise above it. Combined with a guaranteed $140 million/year in EBITDA and a 7,000-metric-ton magnet offtake agreement, this creates a financial safety net for MP Materials, insulating it from volatile commodity markets.

Why This Matters for Investors

The partnership isn't just a lifeline for MP—it's a strategic bet on U.S. rare earth sovereignty. Here's why investors should take note:

1. Mitigating China's chokehold: By 2028, MP's 10X Facility will supply magnets for defense systems, reducing reliance on Chinese manufacturers. The DoD's equity stake ensures the project's survival, even if global REE prices crash.

2. EV and renewables tailwinds: Magnets are essential for EV motors and wind turbines. MP's vertically integrated model—from mining to magnet production—positions it to dominate a market projected to grow 12% annually.

3. Valuation upside: Post-announcement, MP's stock jumped 50%, but its current valuation of ~$3.5 billion may still underprice its monopoly. With guaranteed EBITDA and 70% of magnet output locked in by the DoD, MP's free cash flow could surge post-2026.

Risks on the Horizon

Optimism isn't without hurdles:
- HREE dependency: While MP is expanding HREE separation, U.S. reserves are light on elements like dysprosium (critical for high-performance magnets). Securing supplies from Brazil or Australia could face tariff hurdles.
- Cost competition: Chinese magnets remain 30% cheaper on average. MP must offset its higher costs with government subsidies or premium pricing for “strategic” products.
- Funding gaps: The DoD's FY26 budget for DPA programs is only $266 million, far below the $110/kg price floor's estimated $500 million/year cost. Congress must greenlight OBBBA funding or DPA cap increases.

The Bigger Picture: A Blueprint for Critical Minerals

MP's deal sets a precedent for U.S. critical mineral investments. Investors should monitor companies like Lithium Americas (LAC) or Piedmont Lithium (PLL) that might attract similar DPA-backed contracts. But MP's strategic monopoly—as the only U.S. NdPr producer—gives it an edge.

To Invest or Not?

For risk-tolerant investors, MP Materials offers a high-beta play on U.S. supply chain resilience. The stock's post-deal surge suggests markets see this as a multi-year growth story. However, caution is warranted:
- Hold for the long term: The 10-year guarantees mean MP's value will compound slowly until 2028.
- Watch HREE progress: If MP can't secure HREE supplies, its magnet output will lag.
- Advocate for DPA funding: Congressional action is critical—without it, the price floor could collapse.

In a world where rare earths are the new oil, MP Materials is no longer just a miner—it's a linchpin of national security. The Pentagon's bet could turn California's Mountain Pass into the Saudi Arabia of magnets.

Final Take: Buy MP Materials on dips, but brace for volatility. This is a story of strategic necessity, not just quarterly earnings. For the U.S. to win the rare earth war, MP needs to win the race—and investors stand to gain if it does.