China Escalates U.S. Rare-Earths Tension. What It Means for Mining Stocks.

Monazite ore is a source of rare-earth elements. Coming into Tuesday trading, shares of MP Materials, a large rare-earths miner, were up 311% year to date. (AFP via Getty Images)

Key Points

• China is considering a validated end-user system for rare-earth export licenses, potentially hindering defense contractors’ access to these metals.
• The Pentagon has been working to secure non-Chinese rare-earth supply, including a deal with MP Materials for magnet production capacity.
• MP Materials’ stock was up 311% year to date before Tuesday trading, but was down 18% over the past month due to easing trade tensions.

China might be up to its old tricks, meaning more volatility for rare-earth mining stocks.

Beijing is considering the implementation of a “validated end-user,” or VEU, system for export licenses of its rare-earth elements, The Wall Street Journal reported Monday. Practically, the system would make it more difficult for defense contractors to obtain the metals that end up in everything from communications equipment to F-35 fighter jets.

It is the latest wrinkle in the trade battle between the U.S. and China. The latter, which dominates rare-earth markets with an estimated 85% of global refining capacity, threatened restrictions on rare-earth exports partly in response to President Donald Trump’s tariffs on Chinese goods. Trump recently negotiated the elimination of export controls in trade talks.

The Pentagon needs rare-earth materials and has been working for years to secure non-Chinese supply. In July, the Defense Department signed a deal with MP Materials , the largest rare-earth miner in the Western Hemisphere, that included an equity stake, price floor, and guaranteed customers for rare-earth-magnet production capacity being built by MP.

The deal sent the share of MP and other U.S. rare-earth miners soaring. Coming into Tuesday trading, MP stock was up 311% year to date. Shares, however, were down 18% over the past month as trade tensions with China eased.

More restrictions of any kind from China will likely mean more volatility for rare earth shares.

MP stock fell 3.5% on Tuesday, closing at $61.95, following a 24% gain over the past two days. Third-quarter results, a Wall Street upgrade, and the end to recent selling pressure had led to the jump.

Shares of aspiring rare-earth miners USA Rare Earth and Ramaco Resources rose 3.1% and fell 3.7%, respectively. The S&P 500 and Dow Jones Industrial Average gained 0.2% and 1.2%, respectively.

Coming into Tuesday trading, USA Rare Earth stock was up 50% year to date. Ramaco shares were up 161%.

Investors will need to keep monitoring developments in China. Volatility in rare-earth stocks likely isn’t over.

Write to Al Root at allen.root@dowjones.com