You wouldn’t typically classify Greentech or ESG investing as a national security priority, but that’s exactly what this passage from defense journalist Michael T. Klare lays out.
[The Pentagon’s] prognosis is grim: unless we act now to halt planetary warming and fortify our society against those climate effects that are already unavoidable, the American military will lose its capacity to defend the nation from multiple foreign perils…
That excerpt is taken from “All Hell Breaking Loose,” which continues…
…the homeland itself will be ravaged by storms, floods, droughts, fires and epidemics.
To the Pentagon, climate change generates multiple threats, from major military bases made inoperable by sea level rise and increased stress on poorly designed electrical grids powering those bases, to foreign turmoil and mass migration that inevitably mean the military has to either fight as peacekeepers or operate mass humanitarian aid missions.
That’s why last month’s invoking of the Defense Production Act for rare earth metals wasn’t surprising. President Biden said the DPA will allow the government to support greater mining of rare earths, as well as lithium, cobalt, nickel, graphite and other inputs needed in Greentech innovations, like EVs and large-scale energy storage. The DPA has been invoked hundreds of times since it was authorized in 1946, for projects large – such as prioritizing respirators during the peak of the pandemic – and small, such as a $1.3 million January grant to replace equipment at a small maker of camouflage fabrics for the U.S. military. This appears to be the first time the DPA has specified clean energy as the reason.
Demand for rare earth metals is outpacing supply already by about 3,000 tons a year, according to University of Delaware professor Julie Klinger’s book “Rare Earth Frontiers.” That itself means the world needs to find more sources of metal. Further bolstering the national security argument is that China has a veritable stranglehold on rare earths, with about 80% of global production. For the U.S., supply is even more dire: In each of the past five years the country has had to import 100% of the compounds and metals used, according to data from the U.S. Geological Survey, which tracks commodity demand and production.
There is publicly traded hope for that to change quickly: MP Materials (MP), the sole producer of rare earth metals in the Western Hemisphere.
MP Materials
MP owns and operates Mountain Pass, a large mine in California near the southwest Nevada line. Mountain Pass has been an active mine since the 1950s. Its long-time operator, Molycorp, went public in the 2000s and was a great-performing stock until management overextended itself at the same time China flooded the market with cheap metal. That led to the Mountain Pass mine being mothballed in 2015. It was revived in 2017 as a standalone entity cleaved off from other Molycorp assets sold in bankruptcy. In 2020, MP Materials went public by a merger with a special purpose acquisition company.
Since reviving the mine, MP has only dug out base rare earth metal ore concentrate and shipped it to China. In 2020, the last year of USGS data, it shipped 38,000 metric tons of the stuff to them.
But MP’s business plan is part of the broader reshoring narrative we see throughout Greentech. MP management aims to make the company the only integrated miner and refiner of rare earth metals outside of China. Right now, it’s entering stage two of its three-stage development strategy. Stage two is to partly roast and extract the mined rock into some component NDPR metals (shorthand for neodymium magnet metals), lanthanum (used in cathodes, glass and as a catalyst) and cerium (used primarily in LED lights) as well as continuing production of the rare earth concentrate it sells today. Prep for stage two is near completion and should produce 6,075 metric tons of NDPR, according to management. Stage two will allow MP to boost revenue from $332 million in 2021 to $438 million this year and $653 million next year, with projected earnings per share of $1.30 and $1.86, respectively.
Stage three will be to become a producer itself of NDPR magnets. The business recently broke ground on a Fort Worth, Texas, plant to produce them. The facility will use about 10% of annual NDPR metals production at maximum capacity to build 1,000 metric tons of magnets. As part of the construction, MP inked a deal with General Motors (GM) to supply alloy and magnets for a dozen EVs on the Ultium Platform, GM’s proprietary battery system for its future EVs. Production of the Fort Worth alloy will ramp up slowly toward the end of 2023, with magnets to follow in 2025.
Even if you don’t agree with the Pentagon that climate change is a national security issue itself, MP Materials still is important to national security, since rare earth metals also are vital for America’s technological edge in warfare: The F-35 fighter jet uses 920 pounds of rare earth metals, the Arleigh Burke class destroyer requires 5,200 pounds of them and the Virginia-class submarine needs 9,200 pounds. Prior DPA authorizations sent funding to MP under the guise of needed defense materials as a result. The current authorization hasn’t resulted in specific awards yet, but MP’s business is eligible. The DPA will also help other companies look to develop their own mines.
Given its head start on America’s move back to a clean energy commodity supply chain, I believe MP is a long-term buy.
Do you own any rare earth investments? Tell us about them in the comments below.