Will This Company Be One of The Biggest Winners From the U.S. Tariffs? 664u6a

To Investors, In a previous letter I had mentioned how one of the main reasons for the U.S. imposing tariffs on imports is to create supply chain resiliency in key industries. I glossed through the specifics in that letter, but today I want to double-click on the rare earth minerals supply chain, why it’s important globally, but especially for the U.S., and how a company called MP Materials may emerge as one of the biggest beneficiaries of U.S. tariffs. As a quick reminder, rare earth elements are used to produce permanent magnets which are used to make electric vehicle motors function, used in the robotics industry to give products mobility and functioning, and used in other products such as wind turbines, drones, and smartphones as a few examples. I came across a report from Adamas Intelligence that explains the importance of permanent magnets in the context of technology growth, I picked out a few key examples: * Demand from NdFeB magnets (permanent magnets) will grow from ~230K tons today to ~880K tons by the year 2040 across robotics, electric vehicles, and other technology hardware products. * By 2040, uses of permanent magnets for robotics will exceed usage for electric vehicles * Adamas Intelligence predicts that robotics alone will consume two thirds of today's total magnet demand. Additionally, currently being the largest market for NdFeB magnets, electric vehicles currently constitute about 19% of new car sales globally. According to some reports, year-to-date growth for EV sales in 2025 is around 29-30% globally compared to the previous year; while global sales of fossil-fueled vehicle sales are reportedly declining by about 8% year-on-year. Think about the amount of cars you see daily–a large majority of those may be eclectic in the coming decades. All of that information shows a set-up for enormous market demand for permanent magnets. The country that will supply these magnets will cement itself as having control over technology growth in related categories, not necessarily as a builder of final products, but as a supplier of critical resources upon which these incredible products are dependent on. All of what I’m going to talk about today, especially with regards to MP Materials, matters against this backdrop of significantly higher activity in the robotics industry as well as continuously higher demand for electric vehicles. So going back to the introduction about the importance of MP Materials… MP Materials primarily operates as a rare earths minerals producer and has a rich history in the rare earth elements industry in the United States, originally operating as Molycorp. Molycorp faced financial difficulties, leading to bankruptcy in 2015, but was revitalised in 2017 when a consortium led by JHL Capital Group and QVT Financial LP acquired its assets and renamed the company to MP Materials. This acquisition revitalised the Mountain mine in California—the only active rare earth mine in the U.S.—focusing on producing critical materials for the technologies that I mentioned earlier. In 2021, MP Materials announced plans to build a permanent magnet manufacturing facility in Texas, and that facility is expected to begin production later this year. MP Materials has long been heralded as a United States national champion, because the rare earths supply chain is essentially controlled by one country currently: China—therefore the fact that the United States has a decent, home grown, producer of rare earths is a point of pride for the country. The influence that China has on the United States’ rare earths industry can be summarised in the chart above which shows that in 2022 the U.S. had only 13% of the global mining and beneficiation resources with no mid and downstream capabilities; as well as the chart below which shows that 72% of U.S. imports of rare earths between 2019 and 2022 came from China. With the current escalated trade war taking place between China and the U.S., even though there may soon be a deal to allow the countries to resume mutually beneficial trade, the U.S. no longer wants to be dependent on another country for critical resources. That's the crux of the global trade shake-up that was created by President Trump. The tricky part though, is that it's extremely difficult to compete effectively in mineral resources production because for one, rare earth minerals are not actually rare–the rare part is refining ores and producing specific elements such as neodymium, praseodymium, dysprosium, terbium, lanthanum, etc; and on top of that the only country that houses multiple companies that are able to refine minerals at scale is China. But that’s just the tip of the iceberg. Chinese companies operating in the rare earths industry are mostly vertically integrated and have state backed policies ing them, which makes it near impossible to compete with unless you build a company that is structured in the same way, in a similar economic environment. Here’s why that matters… Vertical Integration: Controlling the Full Supply Chain Vertical integration means owning every step of the process – from mining rare earths to processing them into oxides, and ultimately manufacturing high-value products like permanent magnets. Chinese companies like JL MAG Rare-Earth Co., Ltd. and China Northern Rare Earth Group have mastered this model, producing ~90% of the world’s rare earth magnets, according to various reports. Vertical integration works because it allows businesses to capture more profits, have more control, gain stability, and easily innovate. * More profits: because in any minerals supply chain, the downstream productivity (manufacturing) enables a business to tack on value s related to specialisation and quality, less so in the upstream or midstream productivity (mining, beneficiation, processing minerals to split elements). For example permanent magnets can sell for $200–500/kg vs. $50–100/kg for oxides. * Control: having control over the entire supply chain reduces reliance on other parties. In China, early in the rare earths discovery process the country imposed export restrictions for rare earth minerals, forcing the local industry to develop Chinese based processing and manufacturing capabilities, ed by the state. * Stability: commodity markets tend to experience a lot of volatility for many reasons, therefore flexibility across stages helps weather price swings or supply disruptions. * Innovation: owning the entire process, from mining to manufacturing, allows a company to iterate faster to improve quality. That said, there’s a downside to vertical integration in the mineral commodity environment. One downside is that building manufacturing capabilities can be capital intensive. For example MP Materials was initially only a mining and processing company, selling a lot of their oxides to a Chinese based customer named Shenghe, who would refine those resources. However, MP Materials always had plans to build a western supply chain for rare earth materials so the company quickly built out its rare earth concentrate refining capabilities, and when they were ready, they put together an estimated $700 million for a permanent magnet manufacturing facility, which they call Independence. The other downside of vertical integration is the major risk if a customer cannot fulfil orders. For example the MP Materials’ Independence facility was built largely so that General Motors could buy and use those permanent magnets in their electric vehicles. The problem though is that to date General Motors is experiencing a mixed bag of results with some EV lines doing better than others, but there’s too much customer risk if GM is the main buyer, so to ensure the investment into the Independence facility is viable, MP must secure a wider range of customers for their permanent magnets. Nevertheless, the upsides of vertically integrated supply chains far outweigh the downsides. Minerals Producer: Sticking to Mining So, I’ve already mentioned that a vertically integrated approach to rare earths production is necessary to compete effectively with Chinese companies in the space. Had MP Materials remained solely a rare earths concentrate producer the company would have possibly continued to suffer from volatile price swings of mineral commodity markets. As shown in the chart below, revenues for MP Materials are yet to stabilise because the company’s revenues are still only driven by sales of concentrates–which are experiencing price swings if you look at the changing realised prices per ton of rare earth oxides over the last 5 years. As mainly a player in the upstream and midstream capabilities you also miss out on larger profits that are realised in the downstream capabilities (finished goods). The revenue swings for MP Materials also have a negative impact on the stability of their net income as shown in the chart below. That said, if you encourage an integrated approach to the industry you can capture more value through the final products, so the large capital outlays are easier to justify. Let’s wait for their vertically integrated approach to take shape because it's early days for MP Materials. But even so, it's already been estimated that MP Materials produces ~15% of the world's rare earth oxides, which the company is now largely refining on site as it expanded its capabilities, plus the company announced last Thursday that they would stop exporting their minerals to China and will rather hold production as inventory. I think they’ll end up expanding their refining capacity and just run that process themselves. The cherry on top is the Independence facility, which will no doubt be fielding offers from investors looking to expand that facility to enable larger production volumes. Investor Notes on MP Materials MP Materials’ stock price is up 60% YTD, but is down 54% from it's all time high. I’ve talked about this company a lot in the past couple of years, and it will be fascinating to see how my initial thoughts shape out over time. that MP should be considered a startup because the company was recently bought out of bankruptcy, and in addition to that, there was a lot of work required to get the company’s operations back up and running. It’s hard to build a minerals production business at all, let alone build one that is supposed to offer relief to China’s stronghold on the rare earths industry. On top of the unstable revenue and net income for MP, the company’s operating cash flows have dropped by 96% from 2022 to 2024, although their ending cash balance is up 96% over the same period (cash received from debt and realisation of short term investments). That said, rare earth oxide production continues to grow annually, with the aim of slowly growing production to 60 000 MT according to MP’s annual report. One final note to satisfy investors on the growth of MP Materials is that the company’s revenues from NdPr oxide and metals increased by 83x to $57 million from 2023 to 2024. That shows positive refining capacity growth. While the United States was the second largest producer of rare earths in 2024 with all of the country’s production coming from MP Materials; China was the largest producer of rare earths globally in 2024 with annual production of ~270 000 MT across multiple Chinese based producers. It will be a long road to establishing stable U.S. based rare earths production. The best opportunity the U.S. has to enable resilience in this supply chain would be to 1) MP Materials in every possible way similar to how the Chinese environment s its own businesses– MP’s vertically integrated approach and encourage MP’s success in every competitive and fair way; and 2) as mentioned earlier, rare earths are not technically rare but the refining ability at scale is rare–so the U.S. would also need to other U.S. based upstarts in the space, here’s a list of up and coming U.S. based players… Noting the other U.S. based upstarts in the rare earths industry, I think MP Materials will see incredible growth over the next few years. How they do it will be interesting to watch, but if I had to offer a strategy, I see the company expanding its production sources by acquiring more mineral production operations in the U.S. and multiplying its manufacturing productivity—simply because they have the know-how in the U.S. and they have a head start. Am I the only one excited about all of these macroeconomic shifts we’re witnessing first hand? What do you think about MP Materials and its position in the rare earths industry, given the current global economic environment? What are your thoughts on how to build a national champion that can compete on the global stage? On my journey to becoming a master capital allocator, one lesson down, a billion more to go. Hope you all have a great day -Mansa Thanks for reading Self-Taught MBA! Subscribe for free to receive new posts and my work. To hear more, visit selftaughtmba.substack.com 48i1n