How the US will break China’s rare earth dominance—and how to play it

The 17 rare earth elements, with names like neodymium, cerium, lanthanum, and praseodymium, aren’t as well-known as copper and industrial metals, but they are getting far more attention these days. They are used to make catalytic converters, refine oil, and polish glass, among other uses. But they’re really about magnets, which account for more than 40% of the total rare earth demand. Those magnets are used in everything from the iPhone and electric-vehicle batteries to wind turbines and F-35 fighter jets.

While the minerals aren’t truly rare—they get their name from the fact that they are rarely found in large, concentrated deposits—they are essential.

That fact alone would make China’s dominance of the market—it controls about 85% of global processing capacity—concerning. That China has also been willing to use its near monopoly as a weapon against the U.S. ratchets that concern all the way up to worrisome.

As far back as 2011, China slashed its export quotas on rare earths by more than half over a dispute with Japan, sending prices soaring, and then threatened further restrictions in response to trade tensions during the first Trump administration. This year, China held up export licenses, leading Ford Motor, General Motors, Tesla, and others to warn of plant shutdowns and restricted production. The worst-case scenario was averted when the two countries reached an agreement in Geneva in May, but the episode demonstrated just how exposed the U.S. is to China’s manipulation.

Untenable situations have a way of fueling action. In early July, the Department of Defense sent shock waves through the critical-minerals industry, striking a rare earth magnet deal with a little-known company called MP Materials. MP is a rare earth rarity—a U.S.-based producer that owns a mine, processing plants, and magnet factories—and the deal, which included a large investment from the U.S. government, a price floor, and volume guarantees, was a game changer.

MP’s stock has more than doubled since the deal was announced on July 10, as investors priced in what are essentially minimum revenue guarantees for the company—but it may well have more upside. More important, the agreement is the first step by the U.S. to build rare earth independence.

It was an “absolutely brilliant way to break the back of Chinese mercantilist policies,” says Canaccord analyst George Gianarikas.” Now there is room for the U.S. rare earth industry to grow.”

China didn’t always dominate the rare earth business. In the mid-1980s, the U.S. had almost half of global mine production, while China was an afterthought. Now, it controls 85% of production and has de facto control over the industry. “You can pretty much dictate the marketplace,” says Michael Silver, CEO of American Elements, a distributor of advanced materials, including rare earths. “The economies of scale that come from being really big make it impossible for anyone to compete.”

Part of China’s rapid expansion came from its willingness to build mines and processing plants without the permitting and red tape that would be required in the U.S. But its success ultimately was earned the old-fashioned way: by a willingness to sell its wares at profit margins that no Western company would accept. Consider Shenghe Resources Holding, a publicly traded Chinese rare earth producer whose largest shareholder is the Chinese government. It has generated a net income margin of about 4% over the past decade, about half that of Australian miner BHP.

With the ability to control the rare earth spigot, China can shut down key industries in the U.S. Following President Donald Trump’s “Liberation Day” tariff announcement, China started to delay issuing export licenses for rare earth materials. Defense companies started facing questions from investors about magnet availability. Auto executives started to warn of supply-chain stress. Even Tesla CEO Elon Musk said production of his company’s humanoid robot, called Optimus, was affected by China’s actions.

“The rare earth shortage is real. It’s not hyperbole,” says Morgan Bazilian, director of the Payne Institute for Public Policy at the Colorado School of Mines.

The Department of Defense devised a novel solution to the problem—ensuring that MP, the largest U.S.-based rare earth company, has the wherewithal to go head-to-head with Chinese producers.

MP has its origins in the Molybdenum Corporation of America, which was founded in 1919. In the 1970s, it changed its name to Molycorp and was bought by Union Oil, which in turn was purchased by Chevron in 2005. Chevron sold its rare earth business—including the largest rare earth mine in the U.S., at Mountain Pass, Calif.—in 2008. The new Molycorp went public in 2010 with an ambitious expansion plan, spending some $1.5 billion from 2011 to 2013 to vertically integrate and move from mining all the way to finished magnets. The returns didn’t come—it was competing with China, after all—and Molycorp declared bankruptcy in June 2015.

Enter MP CEO James Litinsky and his partners, Chief Operating Officer Michael Rosenthal and Chief Financial Officer Ryan Corbett, three finance professionals with little experience in mining. They purchased the Mountain Pass mine out of bankruptcy for $20.5 million in 2017 and restarted production soon after. The company began selling concentrate, an intermediate product, in Asia, including take-or-pay contracts—in which one party either takes a required amount of product for a price or pays a penalty—with China’s Shenghe, which owns almost 14 million shares of MP.

With mining ramped up, MP raised $545 million in a merger with a special purpose acquisition company in 2020, using the proceeds to invest in refining rare earth minerals. From there, MP began making magnets, transforming what was just a commodity producer into a vertically integrated, high-growth industrial manufacturer.

MP was plugging along when the Department of Defense deal supercharged its fortunes. The U.S. government took warrants and a $400 million preferred equity stake in the company, effectively making the U.S. government MP’s largest shareholder. The DOD is also guaranteeing that all of the output from a new magnet facility, called 10X, will be sold to it or third parties. Most important, the agreement includes a price floor of $110 per kilogram for neodymium-praseodymium products—about double the price in recent years—to ensure that China can’t bankrupt MP by flooding the market with low-price products.

With the agreement, MP is almost assured of $650 million in annual earnings before interest, taxes, depreciation, and amortization, or Ebitda, when all magnet facilities are at full capacity. The 10X facility should be completed in 2028.

The price floor helps break China’s monopoly, says Baird analyst Ben Kallo. “Over time, it removes that pressure point China had on the U.S.,” he says.

MP alone won’t be enough to help the U.S. break China’s stranglehold over the rare earth market. MP plans to produce about 10,000 metric tons of magnets a year, while Canaccord’s Gianrikas estimates that U.S. total demand for magnets is in the range of 50,000 metric tons annually. Other companies will have to help fill the gap. USA Rare Earth, which has a market value of $1.3 billion, operates the Round Top rare earth mine in West Texas and has a magnet facility slated to start production in 2026, but doesn’t generate sales yet. Ramaco Resources, a metallurgical coal company, is transitioning to become a “critical-mineral producer” by developing its Brook Mine in Wyoming.

Other rare earth minerals will have to come from overseas. Ukraine, for instance, has an estimated $350 billion worth of critical-mineral deposits, including lithium, copper, zinc, titanium, nickel, cobalt, and rare earth elements, and the U.S. reached a deal in April that provides for the creation of a reconstruction fund that will receive 50% of mining royalties, which can be invested in new mining projects.

Now the industry just needs time. It took China a generation to establish its rare earth dominance, and it will probably take a decade to restore balance to the business. By then, MP and other non-Chinese entities could control half of the global mining and refining capacity. The DOD deal could be effective because the business is relatively small—some $2 billion of rare earth oxides are mined a year versus $200 billion of copper—and government money alone is enough to shift the balance of power. The MP deal was a “paradigm shift,” showing that public and private players can design sensible solutions, says Colorado School of Mines’ Bazilian.

Rare earth producers now have a decadelong cash runway ahead of them. But the heavy investment doesn’t make the stocks good bets. Shares of Ramaco, the coal company that is transitioning to a critical-mineral producer, trade for roughly 32 times estimated 2025 Ebitda of $59 million, after shares gained 230% over the past six months. That is well above coal producer Peabody Energy’s four times, and suggests that Ramaco’s rare earth opportunity is fully reflected in the price.

Similarly, Australia’s Lynas Rare Earths is valued at closer to 13 times Ebitda after doubling over the past six months. Like MP, Lynas plans to grow—its “Towards 2030″ strategy involves expanding rare earth mining at the company’s Mount Weld mine in Australia and boosting its refining capacity in Malaysia. But the company doesn’t have a guaranteed-income deal like MP does, and it recently took advantage of stock strength, selling 750 million Australian dollars ($490 million) in stock to support the growth plan. That might signal a “recent local peak in stock value,” wrote a Citigroup analyst on Aug. 28. Citi rates the stock a Sell with a price target of A$9.50, down 34% from recent levels.

Toronto’s Neo Performance Materials, which also traces its roots back to Molycorp, processes rare earths and produces magnets. Only three analysts cover the stock, and all three have Buy ratings on the shares, with an average price target of 24.17 Canadian dollars ($17.40), up more than 40% from a recent C$17.10. It trades for about 11 times estimated 2025 Ebitda of C$66 million after doubling in six months. It’s a small-capitalization stock that investors can watch.

Even the $710 million VanEck Rare Earth & Strategic Metals exchange-traded fund doesn’t offer the diversification that most investors probably would be seeking. MP is the second-largest position in that fund, but rare earth metals account for only about a third of its total exposure, with Chinese producers accounting for about one-half of that. Producers of lithium, a key element in EV batteries, account for another third of the portfolio. Assorted mining and materials companies, such as China’s Baoji Titanium Industry and titanium dioxide producer Tronox Holdings, make up the rest.

Which means that MP might be the best bet, if a pricey one. MP stock quadrupled from less than $20 in May to $82.50 in August, before falling back to a recent $61.90. It now trades at about 20 times estimated 2028 Ebitda of $554 million, up from an expected $13 million in 2025, a premium to just about every other rare earth miner.

It might be worth it. Earnings in 2027 and beyond are essentially guaranteed by the government, says Baird’s Kallo, with additional pricing gains from new customers not baked into numbers. MP is already working with Apple and GM, though prices for those agreements haven’t been disclosed. What value investors will place on that de facto guarantee is hard to say, but it makes MP a less risky investment. Kallo rates MP stock at Outperform and has an $80 price target, up 25% from recent levels.

But the best reason to own MP stock might be where it might be going. Management has a new, three-step plan for the coming five years. First, MP must focus on the magnets it has to produce for the U.S. and its new customers. Next, the company will expand “downstream” into additional finished products, perhaps small electric motors, ultimately providing magnets and eventually other components to businesses, including drones and robots, which will need more magnets than EVs. “Robotics…is an enormous demand opportunity,” CEO Litinsky says.

If all goes well, MP will look less like a mining company and more like a fast-growing aerospace and defense supplier in five years. Such a transition isn’t unheard of. Consider Howmet Aerospace, a maker of engine components, aerospace structures, and fasteners for the aerospace industry that has its roots in aluminum producer Alcoa, which spun out Howmet’s predecessor Arconic in 2016. Arconic split in two in 2019, with Howmet focusing on aerospace and Arconic taking the industrial and construction products.

Today, Howmet’s operating profit margins are 25%, up from 15% in 2020, and it has grown operating profit at 20% a year for the past five years. That has earned it a valuation of 29 times next year’s estimated Ebitda after gaining 934% over the past five years.

There are obvious differences between Howmet and MP. Howmet doesn’t own a mine in an industry dominated by a foreign adversary, and it’s years down the path that MP wants to tread. But it also shows what’s possible when the right company is in the right place at the right time.

MP might be rare, indeed.

Write to Al Root at allen.root@dowjones.com