The world is addicted to technology.
In which case, we’re also addicted to China.
You see, the technology we love to use – from consumer electronics to wind turbines to military technology – depends on certain materials. They make the modern world go ’round. And China has a practical monopoly on them. That’s not just me saying it.
The U.S. Geological Survey reports that, “In 2023, China accounted for approximately 70% of global mine production of rare earth elements and about 85-90% of the world’s processing capacity.”
Cerium. Praseodymium. Neodymium. Promethium. Samarium. Europium. Gadolinium. Terbium. Dysprosium. Holmium. Erbium. Thulium. Yttrium. Lutetium. Scandium. Lanthanum.
The names themselves might not mean anything to you, but you use or benefit from them every single day. And that’s true even if you’re one of the fortunate few who have discovered nirvana by throwing away their smartphones.
Do you drive an electric vehicle? Its battery is full of rare-earth metals.
Do you drive a regular car made after 1974? If so, it has a catalytic converter that also utilizes rare earths.
So do solar panels, wind turbines, high-strength magnets for precision-guided missiles, and top-level military planes. The same goes for sonar systems, electronic warfare systems, laser targeting, night-vision goggles…
I’m sure you get the point.
Bottom line: Without rare earths, the global economy would grind to a halt. And individual nations would find their defense capabilities severely depleted.
Source: Visual Capitalist
That’s why it’s so problematic that a single country – any country, much less China – supplies more than 90% of global output. And that’s why I fully support President Trump’s push to cut rare-earth deals with other trading partners around the world and bolster domestic suppliers.
The Dirty Truth About the Rare-Earths Situation
The funny thing about rare-earth minerals is that they’re not rare at all. These elements are actually fairly abundant in many countries.
In fact, the U.S. itself is blessed with the world’s seventh-largest known reserves of rare earths. Moreover, we used to be the world’s leading supplier back in 1991.
But then China got involved, employing what The Wall Street Journal politely called “aggressive tactics” in an article earlier this week.
Beijing provided financial support to the country’s leading companies, encouraged them to snap up rare-earth assets abroad, and passed laws preventing foreign companies from buying rare-earth mines in China. It eventually consolidated its domestic industry from hundreds of businesses into a few giant players, giving it further leverage over prices.
Moreover:
When the U.S. tried to engineer a revival of its domestic industry a few years ago, China flooded the market with supply, throwing Western producers into a tailspin. As Western rare-earth companies’ valuations collapsed from the low prices caused by soaring Chinese production, they were forced to slow their expansions, and in some cases, sell their mines to Chinese buyers.
China also has no qualms about damaging the environment, whereas most Western countries operate with very strict standards. So that complicates the picture further. The result is that there’s just one active U.S. rare-earth mine today: California’s Mountain Pass out in the Mojave Desert.
Obviously, that’s not good for the U.S. In fact, it’s really not good for the world at large.
That’s why Trump has struck not one but two major mining deals with key allies so far in his second-term presidency.
‘So Much Critical Mineral and Rare-Earth’ Production
The first was with Ukraine back in April, when he and President Zelensky signed an agreement. In exchange for America’s financial and military assistance, Ukraine granted the U.S. preferential access to its natural resources – including rare earths.
Then in July, the Department of Defense (now Department of War) bought $400 million of preferred stock in MP Materials (MP) – owner of that sole, active U.S. rare-earth mine in California. The Pentagon’s investment will help it build a second U.S. magnet manufacturing facility.
That same month, Apple (AAPL) announced a $500 million deal to buy MP’s rare-earth magnets. CEO Tim Cook said, “This partnership will help strengthen the supply of these vital materials here in the United States.”
(It’s funny that he cares about that all of a sudden, but that’s a whole different ball of wax.)
Also in July, Indonesia agreed to President Trump’s tariffs proposal… which included lifting its previous trade restrictions on rare earths. Importantly, the island nation isn’t a major rare-earths producer, but even so…
This marked another small step away from China’s market dominance. Though it can’t compare with what just happened on Monday.
First, Laurenco Goncalves, CEO of Cleveland-Cliffs (CLF) – the second-largest steel producer in the United States – concluded the company’s earnings call with, “Beyond steelmaking, the renewed importance of rare earths has driven us to refocus on this potential opportunity.”
Then, hours later, the U.S. and Australia released an $8.5 billion framework for the mining and processing of critical minerals and rare earths. In typical Trump fashion, the U.S. president remarked that, “In about a year from now, we’ll have so much critical mineral and rare earth that you won’t know what to do with them.”
Personally, I do believe this partnership – and Trump’s other efforts in this area – are worthwhile. But don’t be surprised if it takes a bit longer than a year to see results.
No SWAN Rare-Earths Investments… Yet
I’m hopeful that Wide Moat will recommend companies in the rare-earths industry someday. But since we’re in the business of safe, stable, dividend-paying, sleep-well-at-night (“SWAN”) investment opportunities… that day is not today.
MP Materials, for starters, is hardly a SWAN stock. Its revenue has trended down over the past four quarters. It’s outright unprofitable, resulting in a stock that’s over twice as volatile as the S&P 500.
That’s a hard pass.
I also have no current interest in buying shares of other rare-earths-related companies, such as American Resources (AREC), NioCorp Developments (NB), Royalty Management Holding (RMCO), and USA Rare Earth (USAR). They all feature equally unstable price points, leaving us with few options in this area.
To be clear, it’s possible these stocks will climb higher. But as it stands, they’re little more than speculations today.
But considering how quickly President Trump is acting against China’s monopoly, I will be watching new developments closely. Some truly worthwhile investment opportunity could and should come into play down the road.
But while we wait, don’t get caught up in the hype. My recommendation is to sit tight for now while we watch to see how all this really plays out.
Regards,
Brad Thomas
Editor, Wide Moat Daily
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