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Written by Lee Samaha for The Motley Fool
MP Materials and USA Rare Earth have no direct exposure to Greenland's rare-earth assets.
Critical Metals Corp. and REalloys are the main beneficiaries of the Greenland deal.
If any investor had doubts that rare-earth stocks were subject to volatility due to political events, the recent "Greenland bounce" would go a long way toward dispelling that notion. USA Rare Earth (NASDAQ: USAR) and MP Materials (NYSE: MP) stocks soared and slumped in response to recent events, even though they're unlikely to affect the fundamental case for the stocks. Here's the how, why, and what of the real investment case for the stocks.
The announcement of a defense agreement between the U.S., Denmark, and Greenland raised hopes that U.S. rare-earth companies might benefit from rare-earth extraction in Greenland, not least to source rare-earth materials ultimately used in magnet production in the U.S.
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However, neither USA Rare Earth nor MP Materials has any assets in Greenland, and it seems unlikely they will benefit directly from the deal. In addition, the parts of the arrangement regarding resource extraction do not grant the U.S. any special rights beyond the agreement, which requires unanimous decisions by the U.S., Greenland, and Denmark on mining investments by non-NATO members/partners, or non-European Union members.
In practice, that means countries like China, Brazil, and Russia can't invest in rare-earth assets in Greenland without U.S. approval. Still, the reality is they all have ample rare-earth assets anyway and are unlikely to have had any interest in them.
The deal, however, is a positive for Critical Metals Corp. (NASDAQ: CRML), which has an early-stage rare-earth project in Tanbreez, Greenland, from which it hopes to supply heavy rare-earth elements (HREE) to North America and Europe. It's also good news for REalloys (NASDAQ: ALOY), which has a long-term supply agreement with Critical Metals for production from Tanbreez. In addition, Critical Metals has a joint venture with a Romanian state-owned entity that involves supplying 50% of the Tanbreez Project's premium rare-earth concentrates to the joint venture.
In common with REalloys and USA Rare Earth, MP Materials is operating a mine-to-magnet strategy to develop a non-China-sourced supply of rare-earth magnets. They are the answer to China's overwhelming dominance in the industry. They would help secure the domestic supply chain for critical materials used in myriad technologies across defense, consumer electronics, electric vehicles, industrial sectors, and renewable energy.
In theory, at least, USA Rare Earth and MP Materials could seek supply agreements with Tanbreez and other assets developed in Greenland. Still, it's worth noting that rare-earth materials are not like traditional commodities. They need to be processed and separated first before magnet production is tailored to the source material, and the separation facility also needs to be tailored to the source material.
Although the Greenland agreement is not a game changer for either company, the reality is that they both have plans in progress to execute on their mine-to-magnet strategy. MP Materials is arguably a lower-risk proposition, as it already produces magnets at its Fort Worth, Texas, facility; has two foundational customers in Apple and General Motors; and has begun construction of a new facility in Northlake, Texas. As for the "mine" part, it already has its Mountain Pass, California, asset in operation.
USA Rare Earth began magnet production this year, and the company has derisked its business model by buying Serra Verde -- the owner of a rare-earth mine and processing plant in Brazil -- and plans to commission its Round Top mine in Texas in 2028 to supply rare-earth materials for its magnet production.
Both of these companies have excellent long-term growth opportunities as well as operational risks, but neither depends on nor is likely, at this stage, to involve Greenland.
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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple and MP Materials. The Motley Fool recommends General Motors. The Motley Fool has a disclosure policy.