The Regime Letter: Buy American, Eventually

January 1 won’t end Chinese dependence, but it’ll accelerate the spending needed to replace it.

Happy Friday, everyone! Now THAT was kooky week. We had a little war, a little bond market rebellion, some hedge fund drama, a little earnings drama, and somehow ended up pert near where we started. The market squeaked out a little gain, but underneath it all the same problem kept popping up. We’re burning through weapons, stressing infrastructure and leaning on supply chains controlled by countries we simply don’t trust. So let’s take a look at why the headlines we’re watching now could force some very big changes for strategic materials.

It was one of those weeks where Russia hammered Ukraine, a Russian missile landed inside Poland, the conflict with Iran kept oil and shipping routes uncomfortable, and Kevin Warsh held rates steady while the long end of the Treasury curve started normalizing in a hurry. The 30-year yield reached its highest level since July 2007, the curve steepened, and the S&P 500 somehow finished the week about 1% higher.

Now that doesn’t mean nothing happened. It means the pressure showed up somewhere other than the headline index. The long end is demanding more compensation for inflation, deficits and policy uncertainty, while high-yield spreads widened modestly and investment-grade spreads finished essentially unchanged. Credit is acknowledging more risk, but spreads remain historically tight and still aren’t pricing anything close to a recession. Stocks finished modestly higher, but long-term borrowing costs rose even faster.

The geopolitical message was similar. Ukraine, Poland, Russia and Iran may look like separate stories on the news feed, but economically they keep landing in the same places, including defense production, energy security, shipping costs, industrial capacity and the enormous quantity of material required to replace everything being fired, intercepted or blown up.

So this brings us to this week’s letter, because wars aren’t fought with social media and sound bites, they’re fought with magnets, tungsten, tantalum, antimony and a long list of critical materials that the United States has spent years outsourcing to the same countries it now considers strategic adversaries.

January 1 Meets the Real World

Beginning January 1, the Pentagon is supposed to stop routinely granting waivers that allow defense contractors to purchase covered rare earths, permanent magnets, tungsten, molybdenum and tantalum from China, Russia, Iran and North Korea.

Waivers won’t disappear completely, because reality remains annoyingly resistant to executive orders. Contractors can still receive one if they identify the prohibited source, document an exhaustive search for an alternative, submit a formal mitigation plan and provide a timeline for removing that supplier from the chain.

Defense contractors will have to map their supply chains more deeply, disclose where the prohibited material enters the system, explain why they can’t replace it and begin qualifying American or allied suppliers. Dependence on China will no longer be treated as an unfortunate fact of life. It’ll become a compliance problem that has to be documented, defended and eventually removed.

So this matters because a manufacturer can’t simply replace a magnet, specialty powder or tungsten component because a new supplier opened its doors January 2nd. The material has to be tested, approved and trusted inside aircraft, missiles, radars, motors and guidance systems where “close enough” just doesn’t get er done.

January 1 won’t create mineral independence, but it will force affected defense supply chains to find and document alternatives. And when those alternatives don’t yet exist, government money usually can’t be far behind.

The Gap Is Almost Comical

The arithmetic is where the whole thing comes apart. American demand for neodymium iron boron magnets totaled roughly 48,000 metric tons last year, while domestic sources supplied around 300 tons.

Make sure you heard me correctly, not three hundred thousand, three hundred!

American companies may have enough capacity to produce approximately 5,000 tons by the end of this year, which normally would be darn impressive, right up until you notice that it still only covers about a tenth of what the country actually consumes.

The United States hasn’t produced tungsten domestically since 2015 and hasn’t produced tantalum since 1959, which was a while ago even by the standards of things Washington promises to fix. China, meanwhile, controls more than 80% of global critical mineral refining and dominates several of the processing steps required to turn a deposit into something an American factory can actually use.

That last part is important because this isn’t simply a mining shortage.

The real bottlenecks sit in separation, refining, metals, alloys, permanent magnets and customer qualification. Investors hear “critical minerals” and naturally begin searching for whichever public company owns the largest deposit.

However, a deposit isn’t a supply chain. A picture of a large hole in the ground in an annual report is still just a hole in the ground.

For the past forty years, American companies outsourced these steps because China could perform them more cheaply, at greater scale and with fewer environmental complaints. That was perfectly rational in a world where efficiency mattered more than redundancy, and nobody expected the lowest cost supplier to become the strategic opponent.

Unfortunately, that world is gone.

Follow the Money

The most important part of the story isn’t the January restriction, it’s what Washington has begun doing to make the restriction survivable.

The federal government has already committed tens of billions of dollars across grants, loans, equity investments, permitting support and other programs tied to critical mineral projects. That first phase focused on increasing supply.

The second phase is more interesting because Washington has begun manufacturing the demand required to finance it.

The clearest example is MP Materials.

The Pentagon has given MP a ten-year price floor of $110 per kilogram for NdPr, the neodymium-praseodymium mix used to make high-strength magnets. When market prices fall below the threshold, the government pays the difference. Once MP’s planned 10X facility reaches full production, the government receives 30% of the NdPr sales price above $110.

The separate magnet agreement provides cost-based pricing and guarantees at least $140 million of annual EBITDA once the 10X facility reaches the required production milestone, subject to the contract’s operating requirements and other terms.

Washington has somehow managed to write itself a put and a call in the same agreement. Not too shabby of a deal for DC.

Then there’s Project Vault, a strategic critical minerals reserve backed by up to $10 billion of Export Import Bank financing and nearly $2 billion of private capital. Boeing, GE Vernova, Western Digital and other manufacturers have indicated participation, while commodity firms will help source and store material inside the United States.

So while a stockpile doesn’t create a mine or refinery, it does create a buyer.

That buyer can support inventories, stabilize demand and give lenders greater confidence that a processing facility will have somewhere to send its product once the ribbon cutting is over and the politicians have gone home.

The latest recycling order fits the same pattern. The administration has given federal officials authority to restrict exports of used batteries and electronic waste containing recoverable critical minerals. The United States currently exports nearly 33,000 metric tons of electronic waste every month. Apparently, we’d reached the point where we were borrowing money to find new minerals while shipping the old ones out with the trash.

Now put the whole structure together and the direction becomes pretty, pretty, pretty obvious.

Price floors, guaranteed buyers, government loans, strategic stockpiles, export restrictions, allied sourcing agreements and recycling incentives. This isn’t your dad’s commodity cycle anymore, it’s a government underwritten capital cycle.

What Comes Next

January 1 will probably bring more waivers than Washington would like to admit, but that doesn’t mean the policy has failed. It just means the gap between political ambition and physical capacity is even wider than the government thought.

The waivers will tell Washington where the real bottlenecks live. In many cases, the problem won’t be a giant undeveloped mine, it’s most likely a small processor, a specialized chemical facility, a qualified alloy producer or a magnet manufacturer that nobody bothered to track because this fifty dollar component sits inside a fifty million dollar weapons system.

That information will direct the next round of spending.

We should expect more MP style agreements, but not for everybody. Washington will probably choose a limited number of strategic platforms that can plausibly reach scale, then support them with price protection, guaranteed purchases and low-cost financing. Rinse and repeat.

There’ll also be consolidation because patriotism doesn’t pay construction invoices. Companies with deposits but no processing capability will need partners that have technology, permits, customer relationships and access to government funding. Some will merge, while others will quietly disappear after discovering that putting the word “strategic” in the header doesn’t reduce the cost of building a refinery.

Allied sourcing will become more important, not less. The United States can’t recreate every stage domestically on a political timetable, so the future system will likely include Australian mines, European separation plants, Japanese magnet manufacturers, South Korean processing and Latin American resources connected to American customers.

China’s broader export-control suspension is scheduled to expire later this year, but the exact date isn’t the point. Beijing controls the valve today, and Washington is spending money to build a second pipe.

The new system will be more expensive and less efficient than the one it replaces but hey, that’s the price of redundancy.

But….. It’s also where the investment opportunity may sit.

Where We’re Looking

The companies below aren’t recommendations or a model portfolio. They’re examples of the regions and parts of the supply chain we think deserve a deeper look.

In the United States, MP Materials (NYSE: MP) remains the anchor because it already has mining, separation, magnet production and government support. It’s no longer simply a rare earth miner. MP is being positioned as a protected national industrial platform.

That doesn’t remove the risks. MP still has to execute at 10X, control construction and operating costs and navigate the possibility that Chinese supply pushes market prices lower. The investment case also depends heavily on continued policy support and the terms of its government agreements.

Energy Fuels (NYSE: UUUU) is the more complicated second name. Its White Mesa facility is producing rare earth products, and construction has begun on a commercial scale expansion intended to produce heavy rare earth oxides used in magnets, robotics, data centers, energy and defense.

The operating uranium business gives Energy Fuels a second commercial platform while the rare earth operation scales. The company still faces construction, integration, commodity price and execution risk as it expands.

USA Rare Earth (Nasdaq:USAR) carries more execution risk, but it commissioned the first phase of commercial magnet production in Oklahoma this year and is trying to build an integrated chain spanning processing, metals, alloys and magnets. The opportunity is larger if management executes, but so is the list of ways the plan can go sideways, including financing needs, construction costs and the time required to reach commercial scale.

In Australia, Lynas Rare Earths (OTC: LYSDY) remains one of the cleanest allied producers because it’s already operating. Lynas is one of the few commercial scale producers of separated rare earth materials outside China.

It still carries commodity price, operating and expansion risk, while American investors also must consider currency exposure and the liquidity of the available listings.

Iluka Resources (OTC: ILKAY) is the longer dated buildout. Its Eneabba refinery is backed by an A$1.65 billion Australian government loan and is expected to begin producing separated light and heavy rare earth oxides from 2027. That’s industrial policy with an Australian accent, but it’s industrial policy all the same. It’s also still a construction project, which means timelines and costs matter.

In Europe, Neo Performance Materials (OTC: NOPMF) may be one of the more interesting existing platforms. It operates separation capacity in Estonia, commissioned a heavy rare earth line there this year and is ramping a permanent magnet facility that gives Europe actual downstream capacity rather than another policy document.

Neo is already connecting processing and finished magnets while much of the industry is still connecting management presentations to investment bankers. It’s also a smaller and less liquid company, and the magnet expansion still has to reach commercial scale economically.

In South Korea, Almonty Industries (Nasdaq: ALM) has begun processing operations at its Sangdong tungsten mine. Tungsten may be one of the more immediate areas to research because China controls most global production while weapons systems are consuming material that doesn’t return after launch.

Almonty remains exposed to ramp up risk, commodity pricing, financing needs and the normal surprises that arrive when a large mine moves from development into commercial production.

In Japan, Shin Etsu (OTC: SHECY) and TDK (OTC: TTDKY) offer a different kind of exposure. These aren’t speculative mining projects. They’re established materials and magnet companies with technology, qualified customers and production capability. Japan remains the largest rare earth magnet producer outside China, while its leading manufacturers are expanding capacity, diversifying supply and developing magnets that use less heavy rare earth material.

That matters because qualification is part of the bottleneck. A defense contractor or automaker can’t simply replace a component on Tuesday because somebody opened a refinery on Monday. These companies are less direct expressions of the theme, however, because magnets and critical materials are only part of their broader businesses.

In Latin America, Aclara Resources (OTC: ARAAF) is the higher risk, longer dated expression. It’s trying to connect heavy rare earth deposits in Brazil and Chile with separation capacity in Louisiana, which may be a decent preview of how the eventual allied supply chain gets built, with Latin American resources, American processing and Western customers.

Aclara remains a development stage company, so permitting, financing, dilution, construction and technical execution all matter before the resource becomes a commercial supply chain.

The common thread isn’t geography alone. We want qualified production, processing capability, government support and customers that can’t afford to wait.

The Bottom Line

January 1 won’t end American dependence on Chinese critical materials, but it’ll make that dependence visible, expensive and politically difficult to ignore.

There’ll be waivers because there must be. There’ll also be stockpiles, price guarantees, government loans, recycling programs, allied supply agreements and a great deal more money directed toward companies capable of turning raw material into a qualified product.

I’m certainly not saying the opportunity is simply owning more rocks. It’s owning the businesses that can separate them, refine them, turn them into magnets and deliver them before Washington runs out of patience or Beijing tightens the valve again.

So the stock market finished the week about 1% higher. The long end of the curve didn’t, the wars haven’t stopped and, as I write this, Trump is saying he’s considering a massive new bombing campaign against Iran. But with all of that, the supply chain underneath all of it is about to receive a great deal of money.

Washington can negotiate and they can even move the deadline, but they can’t move the problem.

Luke Perry
Whalen Financial, Portfolio Manager