USAR and PolarStar: Securing National Security Through Domestic Rare Earth Magnet Dominance

The U.S. defense sector's reliance on foreign-sourced rare earth magnets—a critical vulnerability—may soon be a thing of the past. USA Rare Earth (NASDAQ: USAR) has inked a landmark Memorandum of Understanding (MOU) with PolarStar Magnetics, a Tier 2 supplier to aerospace and defense projects, to establish the nation's first end-to-end domestic magnet supply chain. This partnership isn't just about manufacturing; it's a strategic move to dismantle China's stranglehold on 90% of global rare earth production and secure U.S. military and tech superiority. For investors, this is a rare opportunity to profit from a sector where geopolitical risks and regulatory tailwinds are aligning to create long-term, high-margin revenue streams.

The National Security Imperative

Rare earth magnets are the unsung heroes of modern defense systems. They power everything from missile guidance systems to fighter jet avionics and satellite components. Yet, the U.S. has no domestic production capability—until now. The MOU with PolarStar addresses this gap by leveraging two critical assets:

1. Round Top Mountain's Heavy Rare Earth Reserves: USA Rare Earth controls the only U.S. deposit with significant concentrations of heavy rare earths like dysprosium and terbium. These elements are indispensable for high-performance magnets, which require precise thermal and magnetic properties for defense applications.
2. Vertical Integration at Scale: USAR is constructing a 310,000-square-foot magnet manufacturing plant in Oklahoma, paired with its Innovations Lab—a state-of-the-art facility where PolarStar will test and refine magnets to meet Defense Federal Acquisition Regulation Supplement (DFARS) compliance. This ensures magnets are sourced entirely within the U.S. or trusted allies, a mandate now enforced by the DoD for critical contracts.

The strategic importance of this partnership cannot be overstated. As China weaponizes its rare earth dominance—a tactic highlighted in the 2024 U.S.-China trade war—the U.S. military's dependency on foreign suppliers is a ticking time bomb. USAR's MOU with PolarStar directly answers this threat, positioning the company to capture $10+ billion in annual defense magnet spending by 2030.

DFARS Compliance: A Barrier to Entry, and USAR's Competitive Edge

The Department of Defense's (DoD) DFARS clause mandates that contractors source critical materials domestically or from allies. This rule, expanded in 2023, is now a dealbreaker for defense projects. For PolarStar—a manufacturer of programmable magnets for aerospace systems—DFARS compliance is non-negotiable.

By partnering with USAR, PolarStar gains immediate access to a DFARS-compliant supply chain. This unlocks access to lucrative defense contracts that competitors reliant on Chinese imports cannot compete for. For USAR, this is a multi-year revenue pipeline:

• Early-Stage Testing: PolarStar's involvement in early rounds of magnet prototyping at USAR's Innovations Lab accelerates time-to-market, ensuring magnets meet DoD specs faster than rivals.
• Long-Term Supply Agreement: Discussions are underway for a binding multi-year deal, which would lock in recurring revenue streams for USAR while shielding it from commodity price volatility.

The Regulatory Tailwinds Are Unstoppable

The U.S. government is aggressively backing domestic rare earth production. In March 2025, President Biden signed an Executive Order streamlining permitting for critical mineral projects and invoking the Defense Production Act to boost magnet manufacturing. These policies directly benefit USAR:

• Round Top's Permitting: The Texas deposit has already secured key environmental approvals, with full production expected by late 2026.
• DoD Funding: The 2025 National Defense Authorization Act (NDAA) allocates $500 million to support domestic rare earth supply chains—a lifeline for companies like USAR.

This regulatory push isn't just about security—it's about economic leverage. By controlling its own magnet supply, the U.S. can negotiate better terms for tech exports, reduce inflationary pressure from foreign price hikes, and insulate its defense industrial base from geopolitical shocks.

Financial Catalysts and Risks

While USAR's Q1 2025 operating loss of $8.7 million raises eyebrows, its $51.8 million net income (driven by non-cash warrant gains) and $100+ million in raised capital signal strong liquidity. The company's current ratio of 3.52—far above the industry average—proves it can weather near-term costs while scaling up.

The biggest risk? The MOU's non-binding nature. However, the 19% year-to-date stock decline already prices in this uncertainty. Once the multi-year supply agreement is finalized (expected by early 2026), USAR's valuation could surge as investors recognize its monopoly on a DoD-mandated market.

Why Act Now?

This is a once-in-a-decade investment thesis. USAR is not just a rare earth miner—it's the gatekeeper to a $100+ billion industry. With Round Top's reserves, DFARS compliance, and PolarStar's defense ties, it's poised to dominate a sector where the U.S. has no alternatives.

The catalysts are clear:
1. Supply Agreement Finalization: Q4 2025 or early 2026.
2. First Production Line Launch: Late 2026.
3. DoD Budget Announcements: FY2026 spending will likely prioritize domestic magnet suppliers.

Historical performance underscores this opportunity's potential: from 2020 to 2025, a buy-and-hold strategy on earnings announcement dates yielded an average return of 48.12% over 60 days, with a Sharpe ratio of 5.37—indicating strong risk-adjusted gains. While the strategy carried a maximum drawdown of -47.09%, this volatility reflects the sector's high-risk, high-reward profile. For investors willing to ride out short-term swings, USAR's alignment with U.S. strategic priorities makes it a compelling long-term bet.

Investment Action:
USAR is a buy at current levels. Target price: $12–$15/share by mid-2026 (post-supply agreement). Hold for the long term—this is a generational play on U.S. strategic autonomy.

The writing is on the wall: China's rare earth hegemony is crumbling. With USAR and PolarStar leading the charge, investors who act now will own a piece of the infrastructure rebuilding America's military and tech supremacy.