USA Rare Earth Successfully Produces First Sintered Rare Earth Magnets

Highlights

• USA Rare Earth successfully produced its first batch of sintered permanent rare earth magnets at its Stillwater, Oklahoma Innovations Lab.
• The company is going public via a SPAC merger with Inflection Point Acquisition Corp. II, valued at $870 million, to develop a domestic rare earth supply chain.
• The initiative aims to reduce U.S. dependency on China, which currently controls over 90% of the global rare earth magnet market.

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USA Rare Earth, LLC (opens in a new tab) (“USA Rare Earth” or the “Company”), a company building a domestic rare earth magnet supply chain from mine to magnet, announced in a business press release what the firm deems a major milestone – the successful production of its first batch of sintered permanent rare earth magnets at its new cutting-edge Innovations Lab currently under development in Stillwater, Oklahoma.

USA Rare Earth’s Innovations Lab, once fully commissioned, will produce prototype rare earth magnets for the Company in support of customer sales, product quality management, and advancement of new innovations in rare earth magnet production.

According to Joshua Ballard (opens in a new tab), CEO, “I couldn’t be prouder of the work of our incredible team in Stillwater, led by Bob Fredette (opens in a new tab), one of the leading magnet experts in the United States. Our new Innovations Lab, which we will finish building out in the coming months, is already flexing its muscles, helping us achieve a key step in our company’s evolution.”  Ballard continued, “We will soon begin producing customer prototypes in support of future sales as we work towards starting commercial production at our manufacturing facility in 2026.”

China currently dominates the global rare earth magnet market, posing a significant vulnerability for U.S. industries and national security.  The Chinese control about 90% plus of this market, with Japan in second place.

Rare earth magnets are essential for a wide range of applications, including:

• Defense: Missile guidance systems, radar, and other critical military technologies.
• Automotive: Electric vehicles, hybrid vehicles, and advanced driver-assistance systems.
• Renewable Energy: Wind turbines and other clean energy technologies.
• Electronics: Consumer electronics, industrial automation, and medical devices.

Acquisition to go Public

As was announced (opens in a new tab)August 21, 2024, the Company noted it had entered into a Business Combination Agreement with Inflection Point Acquisition Corp. II (Nasdaq: IPXX) (“Inflection Point”) and IPXX Merger Sub, LLC, a Delaware limited liability company and a direct wholly owned subsidiary of Inflection Point.

The Company used Inflection Point Acquisition Corp. II (IPXX), a special purpose acquisition company (SPAC), to become a publicly traded entity. Valued at a pro-forma enterprise value of $870 million, this transaction positioned the Company as a significant player in the rare earth magnet and mining industries. The deal, expected to close in early 2025, marks a key step in the Company’s strategy to establish a vertically integrated U.S.-based rare earth supply chain, targeting critical industries like defense, electric vehicles, and green energy.  Clearly an important bet given all that we know to be a challenge today in the rare earth element supply chain.

The Rationale for the Agreement

 USRare Earth sought to capitalize on the growing demand for rare earth magnets, which is projected to reach a total addressable market of $41.1 billion by 2035. Not to mention the mounting pressure on governments such as the United States to diversify its rare earth element supply chain (including magnets). As Rare Earth Exchanges has reported, one example would be the DoD rule that by 2027, all defense contractors need to procure magnets from non-Chinese sources.  Following a model seen with the Chinese state-backed conglomerates—e.g., a vertically integrated model—from mining at the Round Top deposit in Texas to magnet production in Oklahoma. The hope here is to address the United States’ dependency on China, which dominates the rare earth supply chain.

The point of the SPAC merger is to facilitate access to public market capital, with a $25 million pre-funded PIPE investment to advance its Stillwater facility and potentially accelerate growth.

Note the transaction positions the Company, potentially, as a strategic national asset, leveraging its early-mover advantage in developing domestic rare earth capabilities. The focus on sustainability and innovation, including proprietary separation technologies, aligns with U.S. initiatives to secure critical supply chains. However, as will be discussed below, more industrial policy on this topic will need to be developed by the incoming Trump administration.

Some Rare Earth Exchanges Questions

While the announcement highlights serious potential strategic benefits, the SPAC structure and market dynamics raise critical questions.  While the SPAC provides faster access to capital, it often lacks rigorous vetting, leading to concerns about overvaluation or untested business models.  We do not imply this is the case here, but we introduce serious risk in the form of distorted market dynamics.

SPACs have faced criticism for inflating valuations and underdelivering on projections. Investors may question the $870 million valuation, particularly given that the company’s production is still in its early phases, with no revenue from mining or magnet production yet. Such transactions often come with a high redemption rate from SPAC investors, potentially reducing available capital. Again, we are not implying that this is the case here, but it’s a consideration of diligence.

Importantly, the rare earth sector is notoriously capital-intensive and fraught with regulatory, environmental, and geopolitical challenges. However, we suspect that, under the incoming Trump administration, the regulatory environment will become more business-friendly, especially in the case of the rare earth race.   Regardless, the company will face hurdles in securing permits, scaling operations, and managing environmental impacts. Additionally, China’s dominance allows it to undercut prices, making it difficult for U.S.-based producers to compete without subsidies or tariffs. This latter point must be understood very carefully. They do not operate under the same market assumptions as firms in the U.S., given the massive state backing of the rare earth consolidators in China.

The company’s business plan assumes robust demand for rare earth magnets. However, market shifts—such as advancements in alternative materials or changes in trade policies—could impact its growth trajectory. Reliance on external feedstock in the early production phases also complicates its cost structure.  Regardless, given the Department of Defense 2027 rule that defense contractors must procure non-Chinese based magnets alone, it could be a home run for USA Rare Earth should they execute in the coming couple of years.

So yes, a huge upside for USA Rare Earth, given the unfolding market dynamics.  However, as a SPAC merger, the deal provides less visibility into financials and operational benchmarks. Investors need clarity on how the company plans to achieve its ambitious production targets and manage risks associated with its vertically integrated model.

Company Info

USA Rare Earth, LLC, founded in 2019, is a company building a vertically integrated, domestic rare earth element magnet production supply chain. USARE is building out a magnet production facility in Stillwater, Oklahoma, and controls mining rights to the Round Top heavy rare earth and critical minerals deposit in West Texas. USARE is poised to become a leading domestic supplier of rare earth magnets and heavy rare earth elements needed in the electric vehicle, green energy, consumer electronics, and defense industries, as well as for chipsets, semiconductors, and 5G.

The SPAC

Inflection Point Acquisition Corp. II ( (opens in a new tab)IPXX) is a special purpose acquisition company (SPAC) that completed its upsized initial public offering (IPO) on May 30, 2023, raising $250 million.

Inflection Point Acquisition (opens in a new tab). The company’s sponsor, Inflection Point Holdings LLC, led by executive chairman and CEO Michael Blitzer, played a pivotal role in this process. In addition to the funds raised through the IPO, a private placement of 7.65 million warrants at $1.00 per warrant was conducted, generating an additional $7.65 million. Of these, Inflection Point Holdings LLC purchased 6 million warrants, while Cantor Fitzgerald & Co., the underwriters’ representative, acquired 1.65 million warrants.

Note Michael Blitzer (opens in a new tab) is the founder and co-CEO of Kingstown Capital Management (opens in a new tab), which he founded in 2006 and grew to a multi-billion asset manager with some of the world’s largest endowments and foundations as clients.

Again, in August 2024, IPXX announced a business combination with USA Rare Earth, LLC, a company focused on developing a vertically integrated rare earth element supply chain in the United States. As part of this transaction, existing USA Rare Earth investors and affiliates of IPXX agreed to a pre-funded private investment in public equity (PIPE) of approximately $25 million upon signing the Business Combination Agreement. An additional $9 million was committed, and efforts are underway to secure further funding before closing.

While specific details about individual investors in Inflection Point Acquisition Corp. II (opens in a new tab) are limited, the involvement of Inflection Point Holdings LLC and Cantor Fitzgerald & Co. in the private placement, along with the participation of existing USA Rare Earth investors in the PIPE financing, highlight the key stakeholders supporting IPXX’s initiatives.  See the latest SEC Form 8-K (opens in a new tab).

Risk Involved with Taking on China’s Rare Earth Monopoly

Free market solutions are likely to fail in competing with China’s rare earth element (REE) supply chain dominance because of the fundamentally different nature and structure of China’s rare earth industry. Unlike free-market economies, China’s REE complex operates under a state-controlled and consolidated model, where normal market conditions do not apply. This structural disparity creates significant risks for U.S. private-sector firms like USA Rare Earth, less some very different policies and actions emanating out of Washington DC.

Why is this the case? It’s about government consolidation and control as a strategic economic tool or weapon.   China’s government has consolidated its REE industry into a small number of state-backed giants, such as the China Rare Earth Group (opens in a new tab) or China Northern Rare Earth (opens in a new tab), formed through the merger of the largest REE producers. This centralized structure allows for coordinated production, pricing, and export strategies that free-market competitors cannot match.

Beijing leverages its control to set production quotas, influence global pricing, and undercut competitors through subsidies, creating market distortions.  This control facilitates the use of non-market-based pricing.  For example, state-backed enterprises in China are not constrained by the need to achieve immediate profitability. They can sustain lower prices to maintain global dominance, deterring competitors from entering or expanding in the market.

This artificial pricing environment makes it difficult for private companies, which depend on market-driven returns, to achieve long-term viability.

China’s rare earth supply chain is vertically integrated, from mining and processing to advanced manufacturing. This integration reduces costs and ensures supply security for critical domestic industries, creating competitive advantages that are hard for fragmented private-sector firms to replicate.  This brings up the potential of USA Rare Earth and its holistic vision to become a vertically integrated—mine-to-magnet player. However, to survive, policies in Washington, DC, will need to change in anticipation of short-term price volatility, for example.

That’s because China can manipulate prices by flooding the market with rare earths or restricting supply, creating boom-bust cycles. In this milieu, U.S. firms face significant financial risks from these fluctuations, which can erode investor confidence and disrupt operations.

Simply put, lower prices driven by Chinese overproduction can undercut the business models of U.S. firms that are reliant on higher price points to justify their capital-intensive projects. Unless, of course, under the Trump administration, an Operation Warp Speed for critical mineral resiliency is unleashed, then potentially U.S. firms with the right goods, leadership, execution, and the right support could potentially emerge in a new dawn of U.S./Western rare earth supply chain independence.

But today, we are nowhere near such a policy. As Rare Earth Exchanges has reported, even with the U.S. securing access to Greenland’s vast rare earth and critical mineral deposits, this fundamental dilemma would not change. The lack of a coordinated U.S. industrial policy in this unique situation leaves private companies to compete individually without the same level of government support or subsidies enjoyed by their Chinese counterparts.

This means that U.S. firms face challenges in scaling up processing and manufacturing capabilities without vertical integration and coordinated, well-executed government backing, leaving them dependent on Chinese imports for key stages of the supply chain.

In the meantime, China could use its dominant market share to apply geopolitical leverage, restricting exports to the U.S. and allied nations and creating potential supply crises. 

As we have noted in “The Rare Earth Crisis: Is an Operation Warp Speed #2 Needed for Supply Chain Battle with China” free market principles rely on open competition, cost-efficiency, and innovation to allocate resources effectively.  In the long run, we are fundamental believers in the prevailing law of economics.

However, in the short to intermediate run, when competing against a state-controlled system like China’s, where economic logic is subordinate to geopolitical and strategic imperative, the free market alone likely can prevail. The disparity in incentives, pricing structures, and risk tolerance affords Chinese firms a significant and enduring advantage.

To mitigate these challenges, the U.S. must adopt a tailored, prescribed package of industrial policies that support domestic (or allied network) firms. These policies should include subsidies, public-private partnerships, and strategic stockpiling to level the playing field and ensure supply chain security.

An Operation Warp Speed type of initiative mobilized to execute on the specific mission could be on the table.  In this context, USA Rare Earth, such a confluence of factors could make them a fabulous investment, essentially one of a handful of national utilities facilitating the transfer from dependence on China to an American and/or Western-friendly ecosystem.  

Conclusion

First USA Rare Earth announced the meeting of a major milestone – the successful production of its first batch of sintered permanent rare earth magnets at its new cutting-edge Innovations Lab currently under development in Stillwater, Oklahoma.  Their USA Rare Earth’s Innovations Lab, once fully commissioned, the company reports, will produce prototype rare earth magnets in support of customer sales, product quality management, and advancement of new innovations in rare earth magnet production—all key in the quest for mine-to-magnet rare earth supply chain independence.

USA Rare Earth’s SPAC merger with IPXX represents a bold move to position itself as a leading domestic supplier in the rare earth magnet market, addressing critical U.S. supply chain vulnerabilities. While the deal aligns with national interests and industry demand, it also underscores the inherent challenges of scaling operations in a highly competitive and capital-intensive sector, aside from the bigger challenges raised in the preceding section concerning non-market distortions in the rare earth element supply chain.

Investors should critically assess the company’s projections, financial viability, and operational risks, not to mention monitor the incoming Trump administration’s stance on this very important topic.