The Pentagon Invests into MP Materials: Five Takeaways
The Department of Defense makes an investment into a rare earths mining company, MP Materials.
The mining company MP Materials announced today that it was accepting an investment from the Pentagon into the company in exchange for convertible preferred shares and warrants that, if exercised in full, would give the government a 15% stake in the firm. This would makes the DoD the largest shareholder.
The mining firm will also get a fixed rate loan to help it build a new processing factory and get price guarantees for ten years from the Pentagon for its primary product, a rare earth magnet material called NdPr, or neodymium (Nd) and praseodymium (Pr). NdPr is among the primary inputs for the powerful magnets used in electric car engines, drones, and even F-35 jets.
Here are some takeaways from the press release and other MP Materials filings and reports:
The mine owned by MP Materials has been in operation for over 70 years. MP Materials took over in 2017 from Molycorp for $20 million, which seems like a bargain in retrospect. Molycorp was beset by environmental and financial problems and wound up bankrupt. Molycorp invested heavily into the mine using debt but prices of rare earths collapsed in 2010 when China relaxed its exports of the mineral.
The possibility that China might restrict or relax its exports - driving up or down rare earths prices - is probably part of why MP Materials sought a price floor of $110/kg for NdPr as part of its deal with the DoD. The price floor gives MP Materials a degree of certainty in cash flows as it builds out a new plant. As part of the deal, DoD shares in the upside if NdPr prices go up.
This company was taken public via SPAC (by the so-called SPAC King no less). SPACs - Special Purpose Acquisition Companies - were used to take companies public without going through the more rigorous IPO process. Chamath Palihapitiya led the SPAC that brought MP Materials to the public markets. He earned the nickname SPAC King after bringing Opendoor (90%+ loss since public listing), Clover Health (70%+ loss since public listing), and Virgin Galactic (99%+ loss since public listing). His record is famously poor however it must be noted that MP Materials has done fantastically well since going public via SPAC listing, with shares up over 4x in price (helped by a 50% jump from today’s news).
The DoD was already familiar with MP Materials. This is the second deal that DoD has done with MP Materials: the company was awarded a $35 million contract in 2022 for the purpose of building a processing factory.
“…this is not nationalization”: It’s a public-private partnership! That is at least how the tie-up is framed in the press release. Moreover, the CEO James Litinsky also added this in a televised interview on CNBC:
“‘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.”
The DoD is spreading its bets (sort of). The DoD has awarded contracts to other rare earths companies in hopes of more broadly building an independent supply chain for these strategic minerals, including over $200 million awarded Lynas USA LLC, an affiliate of the Australian mining company Lynas Rare Earths, to build a processing plant in Texas.
While Pentagon investments into publicly-traded companies is unusual, the Department of Defense has long recognized need to invest into technologies in the private sector that might give the U.S. a defensive military edge in the world. DARPA (Defense Advanced Research Projects Agency) is well known for making these kinds of investments into early-stage companies to give them a boost in R&D.
Even the CIA has an affiliated non-profit venture capital firm that does something sort of similar: invest into companies that give the spy agency access to innovative technology (called IQT). Whether making big investments into strategic firms and publicly-traded becomes a trend or not is to be seen but this is an interesting example of the U.S. government’s ability to protect strategic companies with direct investments.