BREAKINGVIEWS-Pentagon digs deep to mine SPAC of last resort

By Jonathan Guilford

NEW YORK, July 10 (Reuters Breakingviews) - Trade-war costs are piling up. China’s chokehold on rare earth metals used in everything from electric vehicles to military equipment has led to a pricey Pentagon deal with MP Materials MP.N to secure domestic supply. It lays bare the price of President Donald Trump’s mercurial and contradictory policies.

Minerals described as rare are abundant, but the deposits are scattered and hard to refine. MP’s Mountain Pass is the only end-to-end U.S. pit focused on magnets. Boss James Litinsky took the miner public by merging it with a special-purpose acquisition company, or SPAC, in 2020.

Like so many other deals with cash-stuffed shells, it has been a disappointment. MP generated less than half the $250 million of EBITDA expected in 2023. It also touted promising markets in EVs and wind turbines, whose prospects have been dampened by the Trump administration.

Worse still, the company relied on an offtake agreement for its unrefined concentrates with China’s Shenghe Resources 600392.SS, a partly state-owned miner that is also an MP shareholder. The country accounts for 91% of rare-earths refining, according to the International Energy Agency, making the threat of cutting off supplies a potent one.

The U.S. Department of Defense unveiled its solution on Thursday. It set a minimum price for MP’s refined neodymium-praseodymium oxide, or NdPr. At $110 per kilogram, it is far higher than the metal’s spot price and its recent historical average.

This should help $7 billion MP offset the loss of Shenghe after it stopped selling to China in April because of Beijing’s tariffs on U.S. imports. As part of the deal with the government, it has agreed to rip up the offtake agreement entirely. The company’s cost to produce NdPr last quarter was about $60 per kilogram, and analysts expect it to produce 5.4 kilotons in 2026, according to Visible Alpha. On that basis, the DoD will fund some $270 million of EBITDA, more than twice as much as was previously anticipated for the whole company. Magnets, too, will benefit from new U.S. military contracts. MP shares jumped more than 40%.

The government was in a tight spot. Stakes held by Shenghe and Australian billionaire Gina Rinehart, along with last year’s takeover approach from Lynas Rare Earths LYC.AX, complicated matters and left MP vulnerable. U.S. taxpayers are nevertheless paying a steep price to secure rare earths, including lending the company $150 million alongside equity ownership, through both preferred stock and warrants exchangeable into common shares. For a Republican party that professes to champion free markets, it's a noticeably forceful fist-bump with the invisible hand.

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CONTEXT NEWS

MP Materials, a miner of rare earth elements, said on July 10 that it had reached an agreement with the U.S. Department of Defense to support its continued expansion.

Under the agreement, the agency is committing to pay a minimum of $110 per kilogram of neodymium-praseodymium products, whether stockpiled or sold, paying MP Materials the difference between the benchmark price and the guarantee each quarter.

The DoD also has agreed to buy all the magnets produced by the company’s 10X Facility, which is under construction, for 10 years.

In connection with the deal, JPMorgan and Goldman Sachs agreed to provide $1 billion in secured financing to build 10X. The U.S. government will provide a $150 million loan to help with other expansion efforts and buy $400 million of preferred shares in MP Materials while receiving warrants that allow it to acquire common stock. If fully exercised, they would represent a 15% stake in the company, before dilution.