Top Rare-Earths Stocks Poised to Ride the U.S. Reshoring Wave

The case for rare-earth stocks like MP Materials (NYSE: MP) and USA Rare Earth (NASDAQ: USAR) rests on the argument that demand for domestically produced rare-earth magnets will be strong enough to create favorable pricing conditions, and that both companies will effectively implement their "mine-to-magnet" business strategy. The two issues are intrinsically linked and closely tied to efforts to reshore manufacturing to the U.S.

Reshoring requires rare-earth materials

Perhaps the most illustrative example of the importance of reshoring and the strategic significance of rare-earth materials and magnets comes from last year's events involving MP Materials.

In the span of less than two weeks, the company entered into a transformative public-private partnership with the Department of Defense that secured a 10-year price floor commitment for its materials, a 10-year commitment to ensure magnets produced at MP Materials' new 10X facility will be purchased, commitments to $1 billion of financing, as well as a $150 million loan from the DOD and a $400 million investment in stock by the DOD.

A few days later, Apple signed a $500 million long-term supply agreement with MP Materials to secure "rare-earth magnets manufactured in the United States from 100 percent recycled materials" from its Fort Worth, Texas, facility. A few days after that, MP Materials raised $650 million in a public offering.

Strategic importance of MP Materials and USA Rare Earth

None of these developments is coincidental. The U.S. government is actively supporting the development of domestic rare-earth magnets and securing the financial future of MP Materials (the U.S. government also made a supportive deal with USA Rare Earth) to reduce reliance on rare-earth materials and magnets from China. That support encouraged Apple to join General Motors as a foundational customer (MP Materials has likely begun making commercial deliveries from Fort Worth to GM) and to secure markets to finance its investment plans.

The need to support domestic production is critical because, in the words of USA Rare Earth CFO William Steele at a J.P. Morgan conference, there's a need for a "bifurcated" market given that "China dominates well in excess of 90% of the market, in fact, up to 99% of certain rare-earth."

Given the importance of rare-earth materials in defense, consumer electronics, semiconductors, drones, and automotive and industrial applications, it's clear that reshoring these activities on a major scale will be difficult unless manufacturers can invest with the surety of a reliable source of magnets.

Image source: Getty Images.

What's next for MP Materials and USA Rare Earth

Neither company is without significant risk, and it's important to note that reshoring is not just about ensuring domestically produced rare-earth materials are available. As if to illustrate that point, the majority of Apple's products are still manufactured in China, and there's nothing in the agreement with MP Materials that says its magnets won't be used in production in China.

That said, removing the uncertainty about manufacturers' ability to reshore production is a major plus and a key support for both companies' business plans. It's also something that's being proactively invested in and encouraged by the U.S. government. Reshoring in certain industries is unlikely to take place without rare-earth magnet supplies -- which is where MP Materials and USA Rare Earth come in.

JPMorgan Chase is an advertising partner of Motley Fool Money. Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, JPMorgan Chase, and MP Materials. The Motley Fool has a disclosure policy.