On Rare Earths, the Pentagon Is Making the Same Mistake Twice
Its investment in a California mining venture is pretty much exactly the wrong approach to securing access to vital materials.
The Pentagon, which peers beyond the horizon using radars powered by rare earth materials, is far more short-sighted when it comes to securing access to the critical elements that drive so much of its high-tech arsenals of today and tomorrow.
This lack of vision is evident in the Pentagon’s recent decision to fund MP Materials, the privately held company that owns the twice-defunct Mountain Pass mine in California. Officials say the investment is part of a strategy to ensure American access to these key minerals. But this deposit does not serve U.S. technology and defense industry needs. For one thing, the geochemistry of the deposit is deficient; for another, the project may well be a geopolitical ruse.
The fundamental problem with the Pentagon’s decision is that the Mountain Pass deposit cannot produce many of the heavy rare earths that are critical to the military. For example, it lacks terbium and dysprosium, used in all high-temperature military-grade magnets for guided weapons, drones and the F-35. (Nor does it serve the U.S. commercial market, lacking lutetium, used in medical imaging devices; thulium and ytterbium, used in X-ray devices; and erbium and holmium, used in medical lasers.)
But there are other reasons to question the Pentagon’s judgment. One is that MP is partially funded by a Chinese company that acts as MP’s sole off-taker. This Chinese participation should have raised serious questions within the Pentagon, as it has within the U.S. Department of Energy.
The first question anyone should ask is: Why would the Chinese commit to buying rare earth concentrates with such a high dead-weight value? More than 82 percent of the concentrate is cerium and lanthanum. These elements are in oversupply and sell below their mined and processed cost.
And then: Why would China bother to haul these low-value materials across California and the Pacific Ocean for processing when it has access to much better rare earths from new producers in Asia and Africa?
Some industry analysts suspect that China’s interest in propping up MP is to use this U.S. company as a proxy to influence U.S. policy with the simple objective of protecting and extending its monopolistic advantage.
Another obvious problem is that MP, like its predecessor Molycorp, ships these materials to China to be converted into their usable form, metals, alloys or magnets, doing nothing to minimize U.S. dependence on China.
Of course, MP says it has a “mine to magnet” strategy, but it is the exact same plan that the now-defunct Molycorp sold to the Pentagon and investors in 2010.
One other problem, not learned from recent history, is that this decision will channel most, if not all, private capital into this one project. Because investors will view the U.S. government’s backing of Molycorp as an endorsement, the U.S. capital markets will overwhelmingly committed capital to that project – leaving all other projects to languish. This is exactly what happened the last time.
At the time of Molycorp’s IPO there were over 450 rare earth projects seeking financing. The U.S. equity markets directed nearly all of their capital into Molycorp while the Japanese government and rare earth dependent end-users backed Lynas.
The Pentagon’s decision in to back the Molycorp project in 2010, resulting in a spectacular bankruptcy in 2015, poisoned the investment well for this sector. No new private equity flowed into this space for the remainder of the decade; essentially gifting China another uncontested decade of rare earth supremacy. The resulting capital drought resulted in the near-bankruptcy of many superior projects, with more than a few being bailed out by the Chinese.
A decade later, and the Pentagon is setting up the dominos for a re-make of this fiasco. The only thing that has changed over the past decade is that China is now leading the U.S. in economic diplomacy in the Asian and African region, home to the many new low-cost Asian and African mining projects, making the commercial environment for a mine like Mt. Pass even more precarious.
The trajectory of this project will not be measurably different from its predecessor and there are no mineralogical, economic or strategic reasons on ‘the Pentagon’s radar’ that can justify this decision. It is a strange and dangerous incongruity that the largest and most generously funded war planning entity in the world cannot see beyond the horizon and has no institutional memory of its past mistakes.
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