Insight: American quandary: How to secure weapons-grade minerals without China

Texas Mineral Resources

23/04/2020 01:37

(Updates with MP Materials award from Pentagon)
    By Ernest Scheyder
    MOUNTAIN PASS, Calif., April 22 (Reuters) - The United
States wants to curb its reliance on China for specialized
minerals used to make weapons and high-tech equipment, but it
faces a Catch-22.
    It only has one rare earths mine - and government scientists
have been told not to work with it because of its Chinese ties.
    The mine is southern California's Mountain Pass, home to the
world's eighth-largest reserves of the rare earths used in
missiles, fighter jets, night-vision goggles and other devices.
    But the U.S. Department of Energy (DOE) has told government
scientists not to collaborate with the mine's owner, MP
Materials, the DOE's Critical Materials Institute told Reuters.
    This is because MP Materials is almost a tenth-owned by a
Chinese investor and relies heavily on Chinese sales and
technical know-how, according to the company.
    "Clearly, the MP Materials ownership structure is an issue,"
said Tom Lograsso, interim director of the institute, the focal
point of the U.S. government's rare earths research and a
facility that typically works closely with private industry.
    "We're going to allow the people in Washington to figure
this out."
    The DOE instruction, which has not been previously reported,
illustrates the competing pressures facing officials looking to
resurrect the U.S. commercial rare earths industry, which has
all but disappeared since its genesis in World War Two's
Manhattan Project to develop the atomic bomb. Lograsso did not
say how the guidance was delivered to the institute.
    Reviving domestic rare earths production has become a
priority in Washington as relations with China, which dominates
global supplies, have become increasingly frayed and U.S.
lawmakers warn of the dangers of relying on a competitor for
critical defense components. 
    Even as the DOE has blacklisted MP Materials, the company is
a candidate to receive up to $40 million in funding from the
Pentagon to produce light rare earths, according to two sources
familiar with the matter. Light rare earths are the
most-commonly used of the specialized materials. 
    The Pentagon has yet to announce its decision on that
funding, which could go to more than one project, after delaying
the decision from March due to the coronavirus crisis.
    Late Wednesday, MP Materials said it had been awarded
Pentagon funding for a facility to process heavy rare earths, a
less-common type of the specialized minerals. The amount was not
disclosed, but the funds will be used for planning and design
work. MP will have to solicit the Pentagon again for
construction-related funds.  urn:newsml:reuters.com:*:nL2N2CA2NO 
    MP Materials is by far the most advanced player in the U.S.
rare earths industry, given no rival project has even broken
ground. As such, Mountain Pass is widely seen by industry
analysts as a front-runner for Pentagon funding. 
    The DOE did not respond to requests for comment on the
instruction to scientists or any potential conflict with
Pentagon policy.
    The Pentagon is working closely with "the president,
Congress, allies, partners and the industrial base to mitigate
U.S. reliance on China for rare earth minerals," said spokesman
Lt Col Mike Andrews. The department did not respond to requests
for comment on whether it might fund Mountain Pass or potential
conflicts with DOE policy.
    
    APPLE TO LOCKHEED
    MP Materials, which bought the mine in 2017, describes
itself as an American-controlled company with a predominantly
U.S. workforce. The privately held firm is 9.9%-owned by China's
Shenghe Resources Holding Co  600392.SS , though, and Chinese
customers account for all its annual revenue of about $100
million.
    "Had we not had a Chinese technical partner helping us do
this relaunch, there's no way this could have been done," said
James Litinsky, chief executive of JHL Capital Group LLC, a
Chicago-based hedge fund and MP Materials' majority owner.
    Litinsky declined to comment on the Pentagon funding. 
    Asked for comment on the DOE instruction to scientists,
Litinsky said: "MP is on a mission to restore the full rare
earth supply chain to the United States of America, whether the
government helps us or not." 
    Shenghe did not respond to requests for comment.
    MP Materials is among a slew of U.S. companies dependent on
China's rare earths industry. Apple Inc  AAPL.O  uses Chinese
rare earths in its iPhone's taptic engine, which makes the phone
vibrate. Lockheed Martin Corp  LMT.N  uses them to make the F-35
Lightning fighter jet. General Dynamics Corp  GD.N  uses them to
build the Virginia-class submarine.
    The COVID-19 pandemic has further driven home the global
nature of supply chains and just how heavily Western countries
rely on manufacturing powerhouse China for a host of key
products, including drug ingredients. 
    
    MANHATTAN PROJECT
    Mountain Pass first opened in the late 1940s to extract
europium, a rare earth used to produce the color red in
televisions. It drew heavily on technology developed by
Manhattan Project government scientists to separate the 17 rare
earths, a complex and expensive process.
    By the early 1980s, the mine was a top global rare earths
producer. Its minerals were in much of the equipment that U.S.
soldiers used during the first Gulf War in 1990.
    However, China ramped up development of a massive rare
earths refining network and began boosting exports, undercutting
other producers. "The Middle East has oil. China has rare
earths," then-Chinese leader Deng Xiaoping said in 1992.
    In 2010, China halted supplies to Japan during a diplomatic
dispute, unnerving U.S. military officials who wondered if China
could one day do the same to the United States. 
    That refocused Washington's attention on the mine and its
then-owner Molycorp, which launched a $400 million initial
public offering the same year.
    Even as U.S. government scientists began research projects
with Molycorp, though, the company went bankrupt in 2015 under
the weight of its debt - partly built up to comply with
tightened environmental regulations from the Obama
administration - and cheaper Chinese competition. 
    Two years later, Litinsky's group and Shenghe bought
Mountain Pass out of bankruptcy. The processing equipment
installed by Molycorp, however, remains unused because of poor
design, Litinsky said.
    For now, MP Materials ships more than 50,000 tonnes of
concentrated rare earths per year to China for processing, the
Achilles heel of the U.S. industry.
    The company aims to restart its own processing by the end of
2020, Litinsky said. The goal is to produce about 5,000 tonnes
per year of the two most common rare earth metals, more than
enough for U.S. military needs.
    Some rare earths analysts and academics have doubted whether
Mountain Pass can resume processing so soon, citing concerns
about its plans for waste disposal and water filtration.
    
    'NATIONAL SECURITY MALPRACTICE'
    Florida Republican Senator Marco Rubio told Reuters that the
United States' reliance on China for defense components could
pose a strategic military threat. 
    "It would be national security malpractice not to address
this," said Rubio, who sits on the Senate's Intelligence and
Foreign Relations committees.
    This was echoed by Representative Chrissy Houlahan, a
Pennsylvania Democrat, who said the issue of creating a viable
domestic industry had been ignored for too many years.
    "This isn't an issue we can just kick down the road," said
Houlahan, who sits on the House Armed Services Committee.
    The Pentagon asked miners in early 2019 to outline plans to
develop rare earths projects and processing facilities,
according to documents seen by Reuters.  
    President Donald Trump sharpened the directive last July,
telling the Pentagon to fund U.S. rare earths projects and find
better ways to procure military-grade magnets made from rare
earths.  urn:newsml:reuters.com:*:nL2N24A1E8  urn:newsml:reuters.com:*:nL2N24N1LH  urn:newsml:reuters.com:*:nL1N28Q1RM  urn:newsml:reuters.com:*:nL1N28F2AS
    Earlier on Wednesday, Australia-based Lynas Corp  LYC.AX 
and privately held Blue Line Corp also said they were chosen by
the Pentagon to process heavy rare earths imported from
Australia in a plant to be built in Texas. The deadline to apply
for that for that project was in December.  urn:newsml:reuters.com:*:nL3N2CA1UE
    Other applicants for the Pentagon funding programs included
Texas Mineral Resources Corp  TMRC.PK ; a joint venture between
Alaska's UCore Rare Metals  UCU.V  and Materion Corp  MTRN.N ;
Medallion Resources Ltd  MDL.V  and Search Minerals Inc  SMY.V ,
both of Canada; and Nebraska's NioCorp Developments Ltd  NB.TO .
 urn:newsml:reuters.com:*:nL1N28F2AS  urn:newsml:reuters.com:*:nL1N28Q1RM
    For a FACTBOX about these projects, click here:  urn:newsml:reuters.com:*:nL1N2C6097
    Meanwhile, U.S. government scientists at the DOE institute
are studying ways to recycle rare earth magnets, to find
substitutes and to locate new sources of the strategic minerals.
None of that research is shared with MP Materials. 
    "MP Materials recognizes they have become the elephant in
the room that the U.S. government doesn't want to acknowledge,
given their relationship with Shenghe," said Ryan Castilloux, a
rare earths industry consultant at Adamas Intelligence.

 (Reporting by Ernest Scheyder; Editing by Amran Abocar and
Pravin Char)
 ((ernest.scheyder@thomsonreuters.com; Twitter: @ErnestScheyder;
+1-713-210-8512; Reuters Messaging:
ernest.scheyder.thomsonreuters.com@reuters.net))