rewrite this title Pentagon to become largest shareholder in rare earth miner MP Materials; shares surge 50%

The Defense Department will become the largest shareholder in rare earth miner MP Materials after agreeing to buy $400 million of its preferred stock, the company said Thursday.

MP Materials owns the only operational rare earth mine in the U.S. at Mountain Pass, California, about 60 miles outside Las Vegas. Proceeds from the Pentagon investment will be used to expand MP’s rare earths processing capacity and magnet production, the company said.

Shares of MP Materials soared about 50% to close at $45.23. Its market capitalization grew to $7.4 billion, an increase of about $2.5 billion from the previous trading session.

Rare earths are used in magnets that are key components in a range of military weapons systems including the F-35 warplane, drones and submarines, according to the Defense Department.

The U.S. was almost entirely dependent on foreign countries for rare earths in 2023, with China representing about 70% of imports, according to the U.S. Geological Survey. Rare earths have been a central point of contention in recent trade disputes between the U.S. and China.

Interior Secretary Doug Burgum said in April that the Trump administration was considering making direct equity investments in critical mineral companies to break U.S. dependence on China.

MP Materials CEO James Litinsky described the Pentagon investment as a public-private partnership that will speed the buildout of an end-to-end rare earth magnet supply chain in the U.S.

“I want to be very clear, this is not a nationalization,” Litinsky told CNBC’s “Squawk on the Street” on Thursday. “We remain a thriving public company. We now have a great new partner in our economically largest shareholder, DoD, but we still control our company. We control our destiny. We’re shareholder driven.”

U.S. miners are facing a unique threat from “Chinese mercantilism,” Litinsky said. The Pentagon investment in MP could serve as a model for similar deals with other U.S. companies, the CEO said.

“It’s a new way forward to accelerate free markets, to get the supply chain on shore that we want and make sure that mercantilism is not going to hurt our ability to do so,” Litinsky said.

Public-private partnership

The Pentagon is buying a newly created class of preferred shares convertible into MP Materials’ common stock, in addition to a warrant convertible at $30.03 a share for 10 years that allows the U.S. to buy additional common stock.

Exercising the convertible preferred shares and the warrant would leave the Pentagon holding about a 15% stake in MP Materials as of July 9, nearly twice the 8.61% held by Litinsky and the 8.27% held by BlackRock Fund Advisors, according to FactSet data.

MP Materials will build its second magnet manufacturing facility in the U.S. to serve defense and commercial customers with support from the Pentagon. The facility, whose location wasn’t disclosed, is expected to start commissioning in 2028 and will bring MP Materials rare earth magnet manufacturing capacity to 10,000 metric tons annually.

This manufacturing capacity is enough to “meaningfully support U.S. defense and commercial needs,” Litinsky told investors on a call Thursday morning.

The Pentagon has agreed to buy 100% of the magnets made at the new facility, called 10X, for 10 years after the plant is built to support defense needs and the commercial market. JPMorgan and Goldman Sachs are providing $1 billion to help finance the manufacturing facility.

The Pentagon is also guaranteeing a minimum price of $110 per kilogram for 10 years for neodymium-praseodymium oxide, or NdPr, that is stockpiled or sold by MP Materials. NdPr is a rare earth compound used to make permanent magnets.

If the market price is below $110 per kilogram, the U.S. will pay MP Materials the difference in a quarterly cash payment, Litinsky said. The Pentagon, in turn, will receive 30% of the upside above $110 per kilogram once MP Materials’ second magnet facility is operational, the CEO said.

The Defense Department negotiated a very tough deal, Litinsky said. “The taxpayers are going to make a lot of money,” the CEO said.

MP Materials also expects to receive a $150 million loan in 30 days from the Pentagon to expand its rare earth separation capabilities at Mountain Pass.