The Defense Dept. Just Invested Billions in MP Materials. Should You Buy Too?

An Historic Public-Private Partnership

The U.S. Defense Dept. announced yesterday it was making a multibillion-dollar investment in MP Materials (NYSE:MP), the sole operator of the rare earth mineral mine in California. It will secure a 15% stake in the company to bolster domestic rare earth mineral production in a bid to reduce U.S. reliance on China, which controls nearly 90% of global rare earth refining. 

Mountain Pass is the only active rare earth mine in the U.S. and MP is a critical player in the global supply chain for neodymium-praseodymium (NdPr), essential for magnets used in electric vehicles, defense systems, and renewable energy technologies.

The government will acquire a newly-created series of preferred stock convertible into shares of MP’s common stock, and a warrant permitting the Defense Dept. to purchase additional shares of MP stock. The initial conversion price and exercise price are $30.03 per share.

Following the announcement, MP stock surged over 50% to close at $45.23 per share, reflecting investor optimism about its role as a national security cornerstone.

MP says it plans to use the proceeds of the investment ​​to expand its existing rare earths separation and processing capabilities, as well as its magnet production capacity. 

But with such a significant government stake and a soaring stock price, should individual investors follow suit and buy into MP Materials, too?

A Rare Government Stake in Private Enterprise

The U.S. government taking an ownership stake in a private company is an uncommon occurrence, typically reserved for moments of economic crisis. During the 2008 financial crisis, for example, the government acquired significant stakes in General Motors (NYSE:GM) and American International Group (NYSE:AIG) to stabilize critical industries. These interventions, authorized under the Troubled Assets Relief Program (TARP), were temporary, with the government divesting its shares in AIG by 2012 and GM by 2013, recovering most of its investments. 

Historically, such actions — dating back to the Reconstruction Finance Corporation in the 1930s — have been short-term, aimed at preventing economic collapse. The Defense Dept.’s investment in MP Materials, however, diverges from this pattern. 

Structured as a long-term public-private partnership, the $400 million equity purchase and $150 million loan signal an ongoing ownership position. The Defense Dept. is committing to buy MP’s magnets for a decade and guaranteeing a price floor of $110 per kilogram for NdPr.

Concerns Over Government Ownership

This ongoing government involvement raises significant concerns. Government ownership of private companies can distort market dynamics, prioritizing political objectives over economic efficiency. It risks crowding out private investment, as government backing may deter competitors or skew capital allocation. 

Additionally, it raises points of potential conflicts of interest, where government influence could pressure companies to align with policy goals rather than shareholder interests. It also puts the government in the position of both investor and regulator. In MP’s case, the Defense Dept.’s role as the largest shareholder could lead to decisions favoring national security over profitability, potentially undermining long-term value creation. 

Furthermore, the guaranteed price floor — while stabilizing MP’s revenue — may burden taxpayers if market prices fall below $110 per kilogram. Such interventions could also set a precedent for increased government overreach in private markets, a concern for free-market advocates.

Should You Buy MP Stock?

The Defense Dept’s 15% stake in MP Materials underscores its strategic importance in securing U.S. rare earth supply chains, driving a 50% stock surge and highlighting its growth potential in a $4 billion market for clean energy and defense. However, the ongoing government ownership introduces risks, including market distortions and potential prioritization of policy over profits. 

For risk-tolerant investors, MP’s unique position and government backing make it an appealing bet on rising rare earth demand. However, cautious investors should be wary of uncertainties related to government influence and taxpayer-backed guarantees. While the stock’s momentum is strong, the long-term implications of this precedent-setting decision should raise red flags for investors and taxpayers alike.