CDR Salamander - All the Expanded Shipyard Capacity Won't Help us if we Don't Do this First

There has been a growing awareness over the last couple of years—and especially the last year—about the “rare earth element” challenge.

It is more than a challenge, it is a problem. Why a problem? Global supply systems, etc...

Those who know the industrial history of WWII will know that despite of their technological skills, the Germans could not produce the number and quality of the weapons they wanted to because they could not source sufficient critical “exotic” raw materials—not to mention just fuel. As a result, they could produce only a few and those they could produce, such as jet engines, had to use lesser materials and did not last as long.

The Japanese, as an island nation with few raw materials but human capital, struggled with even the basics once the peacetime “global supply chain” became but a memory.

Their problems weren’t that they didn’t know they had a problem accessing materials at the start of the war, as they had stockpiled cobalt, vanadium, titanium, tungsten, chromium, molybdenum, and other exotic metals. The Germans even had access to some usable deposits in some of the conquered lands such as France and the Balkans, the Japanese in China. However, they did not stockpile for a long war, and by 1943 allied interdiction of sea and ground lines of communication made getting materials to their increasingly bombed-out industrial areas exceptionally difficult and inefficient.

In 2025, it is the USA and its allies that are Nazi Germany and Imperial Japan when it comes to critical supplies needed to fight any kind of protracted war.

The People’s Republic of China (PRC) is the nation that is not just the industrial superpower, they have managed to corner both the supply and the supply chain of the world’s light and heavy rare earth elements—and in many critical cases the ability to process it into usable material.

Regulars here know what the PRC has done in shipbuilding. While the USA and its allies focused on handling millions of uninvited, military-aged, unemployable young men from wherever after a couple of decades engaging in fruitless imperial policing actions and nation building for people uninterested and unable to be built, the PRC was focused on its strategic goal: to supplant The West as the leader of the world.

They looked at history with a cold, old world eye, and set to work. One of those lines of operation was the raw material that anyone would need to seriously contest them in the military sphere once they were strong enough to stand.

It isn’t just the mines and supply chains, it is how the CCP through controlling interest in many companies is prioritizing China.

I had a bit of time on the road over the weekend and listened to the MWI Podcast: The US Military’s Critical Minerals Challenge, with Dr. Morgan Bazilian, director of the Payne Institute for Public Policy at the Colorado School of Mines.

You can listen to the above link or via the Spotify link below.

I thought I was doing a responsible job tracking the issue, but man was I wrong. I learned more in that 1-hr podcast than I have in my readings for the last few years.

The bold-faced takeaway for me was that, for a moment, I was reassured to hear we do have a reserve based on expected requirements found from a series of wargames against the PRC, but it is only enough of a reserve to fight for one year.

Excuse me?

I’ve got news for everybody. The next great Pacific War that might evolve into a world war, it's gonna go for a long time. Expect at least World War II length. We are not ready. All indications show that China has been getting ready for years using the best mercantilist, capitalist, and good old fashioned communist bullying.

We are a bit late to the game. Just one of the examples that kept coming up during the interview was MP Materials (MP). You know, the company that owns the only operational rare earth mine in the U.S. at Mountain Pass, California.

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.

…

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.

…

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.

Remember, MP Minerals owned the only U.S. rare earth mine. However, who was benefiting?

As of December 2021, Shenghe Resources, a Chinese company partly owned by China's Ministry of Natural Resources, held approximately 7.7% of MP Materials' stock.

MP Mining could produce all the rare earths it wanted, but in the U.S. at least, there wasn’t much they could do with it. They primarily sent their rare earth ore concentrate to the PRC for refining. The refining was done by, you guessed it. Shenghe Resources, owned by the PRC’s Ministry of Natural Resources, which is controlled by the Chinese Communist Party.

Bravo Zulu to Interior Secretary Doug Burgum.

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.

You can’t fight and win a war when you have to rely on your enemy for the raw material to build weapons.

More.

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