As far as I can see it is pasting the edges of the images together, or overlapping and resizing them if necessary to get a good fit.
Essentially, but they do more than that. Also, they may trim the edges arbitrarily - at an angel, in a curved, or even squiggly line.
It's not cutting out the rocks individually. What makes you think that?
They will cut out rocks, or use them more than once or get the spacing between them worng. It is inadvertent. As I said, if the perspective changes, or the lighting changes, or even the magnification changes and the software can no longer recognize key points it may delete them, miss align them, or duplicate them. I could demonstrate if you like. Almost every time I have let software automate the stitching process this sort of thing happens.
The changes in the scene are quite odd, and go far beyond a simple overlap issue. The mosaic software isn't taking liberty to recreate the entire martian surface, one rock at a time. It's fitting together images.
No, not one rock at a time. It's fitting together images but it makes mistakes.