The 99% problem

China refines more than 99% of the world’s heavy rare earths. That single statistic, from Joel Litman’s Altimetry presentation, is the foundation of the rare earth investment thesis. There is no electric vehicle, no smartphone, and no F-35 fighter jet that gets built without heavy rare earths, and the supply chain that produces them runs through a single country.

As we detail in our full review of the Second Declaration presentation, Litman traces this dependency back to a specific playbook. China flooded the market in the 1990s, drove the price below what any American producer could match, and drove the domestic industry into bankruptcy. Then they bought the assets.

The Mountain Pass story

Mountain Pass, California, held the largest rare earth deposit in the Western world. We mined it. Then China did what mercantilism does. It flooded the market, undercut the price, and drove the American producer into bankruptcy.

By 2017, Mountain Pass had been bought out of bankruptcy by a group that included a Chinese-owned firm. It was shipping American ore to China to be refined. We were mining the raw material in California, shipping it to China, and buying back the finished product. The colonial loop Jefferson warned against in 1793, running in 2017.

Today, China refines more than 99% of the world’s heavy rare earths, and the remaining 1% is a sliver of global supply that the entire Western economy depends on.

The Pentagon response

The presentation describes a specific shift in U.S. policy. The Pentagon took a $400 million stake in MP Materials, the company that now operates the Mountain Pass mine. This was not a grant or a subsidy. It was an equity investment. The U.S. government became a shareholder.

As Litman explains the logic: “When the government regulates a company, the company looks for ways around the rules. When the government becomes an owner, it wants the company to succeed. It’s a completely different relationship.”

This is a meaningful distinction. A subsidy is a payment. An equity stake is a partnership. The government’s $400 million is not just money. It is a commitment to seeing MP Materials succeed, because the government’s own return depends on it.

The same pattern followed with Intel. The government bought 10% of Intel, because Intel makes its chips in the U.S. while Nvidia, AMD, and Apple outsource their manufacturing to Taiwan. If the U.S. wants to make advanced chips on its own soil, Intel is the key.

Beyond rare earths

The rare earth story is the most visible example of the dependency problem, but the presentation identifies others:

Gallium. It goes into radar, advanced chips, and fiber optics. In 2024, China banned its export to the U.S. One firm counted more than 11,000 parts in American defense systems that need it.

Graphite. Nearly every lithium-ion battery is built on it, and China controls more than 90% of the supply.

Shipbuilding. During World War II, the U.S. built 2,700 Liberty ships. Today, China produces more than 1,000 ocean-going vessels for every eight built by the United States. A 200-to-1 manufacturing advantage.

Drones. Roughly 8 out of every 10 drones used by U.S. law enforcement and first responders are built by a single Chinese company.

Each of these is a chokepoint, a critical input that the American economy or military depends on, controlled by a foreign supply chain that could be cut off at any time.

The investment thesis

The rare earth investment thesis has three components.

The supply gap. China controls 99% of heavy rare earth refining. The West needs a non-Chinese supply chain, and building one requires mines, refineries, and processing facilities. The companies that build this infrastructure are the direct beneficiaries.

The government commitment. The Pentagon’s $400 million investment in MP Materials is real money from a real budget. The CHIPS Act committed $52 billion to domestic chip manufacturing. Both parties have passed legislation to fast-track rare earth and critical mineral production. The government is not just encouraging reshoring. It is funding it.

The demand growth. Electric vehicles, wind turbines, drones, and defense systems all require rare earths. The demand is growing as the energy transition accelerates and as defense spending rises. A supply chain that is already constrained, with 99% concentration in one country, facing growing demand, is a recipe for higher prices and higher margins for the companies that can produce outside that chain.

The honest risks

The rare earth thesis is compelling, but it has real risks. Building a non-Chinese rare earth supply chain is expensive and slow. Refineries cost billions and take years to construct. The Chinese supply chain is deeply entrenched, and China can flood the market again to undercut new entrants, the same playbook that drove Mountain Pass into bankruptcy in the first place.

MP Materials, the most visible U.S. rare earth company, has faced real operational challenges in building its refining capacity. Government investment helps, but it does not guarantee commercial success.

The honest read is that the rare earth thesis is a multi-year, probably multi-decade story. It is not a quick trade. But the structural driver, the need to break a 99% dependency on a single country for materials that are essential to the modern economy and the military, is not going away.

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