Better Mining Stock to Buy Before 2026 Ends: USA Rare Earth vs. Freeport-McMoRan

USA Rare Earth (NASDAQ: USAR) is a fine and worthy investment option for investors seeking a high-risk, high-reward play on the solution to securing a domestic supply of rare-earth materials. However, on a risk/reward basis, I think copper miner Freeport-McMoRan (NYSE: FCX) is a better investment right now. Here's why.

USA Rare Earth has more upside potential

To be clear, this isn't an argument about preferring a lower-risk, lower-reward option. Instead, it's based on the idea that Freeport-McMoran offers a better expected return than USA Rare Earth, given the potential upside and downside of the stocks.

The investment case for the rare-earth company is based on its vertically integrated "mine-to-magnet" business model. However, it's somewhat unusual in that it's almost a back-to-front process, whereby the company will develop and ramp up metals and magnet production at its Stillwater, Oklahoma, manufacturing plant before commercial extraction from the Round Top, Texas, deposit begins in 2028.

Management has laid out its financial objectives, and we can compare them with what Wall Street analysts expect for Freeport-McMoRan to make a direct comparison. For reference, all the numbers in the following table are sourced from Visible Alpha consensus of Wall Street analysts. Note that the USA Rare Earth estimates are more optimistic than management's 2030 targets of $2.6 billion in revenue, $1.2 billion in earnings before interest, taxation, depreciation, and amortization (EBITDA), and $900 million in free cash flow (FCF).

Data source: Visible Alpha.

For argument's sake, assume 15 times FCF is a fair value for a cyclical miner. This assumption gives a target price of $67.50 for USA Rare Earth, representing an annual return of about 48%, compared with about $14.6% for Freeport-McMoran to get to $115 in 2030 from $62.60 now.

Based on the estimates in the table, USA Rare Earth has significantly more upside potential than Freeport-McMoRan. Still, that's not the full picture, because you also have to consider the risks involved in reaching those numbers.

USA Rare Earth risk considerations

USA Rare Earth has a significantly more risky path. Not only does the company need to sustain losses and cash outflows before it turns profitable, but it also has to achieve commercial-scale production at Stillwater, manage potential delays in the supply of rare-earth feedstock, and execute on the development of a technologically complex, relatively low-grade mining project at Round Top. There may also be permitting issues.

Any failures along the way could require additional funding, diluting existing shareholders.

Freeport-McMoran

In contrast, Freeport-McMoRan's path to reaching the 2030 numbers and growing beyond it looks much less risky. It's a mature copper miner set to increase copper production from 3.1 billion pounds in 2026, a relatively low level because of a mining accident in Indonesia, to 4.1 billion pounds in 2028. Moreover, it has a low-cost leaching initiative, extracting copper from existing stockpiles, that management believes can lead to 800 million pounds of copper production by 2030.

On top of that, Freeport-McMoRan can address the ever-more-important question of expanding copper production in an era when it's becoming increasingly difficult to obtain greenfield planning permissions.

The good news is that the company has brownfield expansion plans in progress to double production at its Bagdad, Arizona, site and add 200 million to 250 million pounds of annual copper production. It also submitted permit applications for a new mill at a site in Chile, which could add 700 million pounds of copper per annum in the early 2030s. In addition, it has expansion projects in place in Indonesia and is in the study phase for an expansion at a site in Lone Star, Arizona.

Image source: Getty Images.

Freeport-McMoRan is the better buy

While both companies have to deal with the vagaries of the impact of the underlying price of the copper (Freeport-McMoRan) and rare-earth magnets (USA Rare Earth) on their revenue, Freeport-McMoRan's easier pathway and richer valuation more than offset the myriad political, execution, market, and dilutive risks around USA Rare Earth for most investors. Ultimately, it's a subjective choice, but I think the copper miner is the better option.

Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.