Here's Why USA Rare Earth Stock Crashed in November

Shares in USA Rare Earth (NASDAQ: USAR) crashed by 30.8% in November, according to data provided by S&P Global Market Intelligence. It's the kind of performance that highlights the highly speculative nature of investing in rare-earth companies in the current environment, not least due to their sensitivity to political developments.

U.S. and China's rare-earth relations

The simple fact is that China dominates the market for rare-earth materials and rare-earth magnets, producing up to 90% of the world's supply of the latter. This gives the country a strong bargaining position in trade disputes with the U.S., and it also gives the Trump administration a powerful incentive to take measures to ensure a long-term domestic supply of rare-earth materials and magnets.

As such, whether investors like it or not, stocks like USA Rare Earth will be influenced by developments in trade negotiations and speculation surrounding them. Consequently, USA Rare Earth stock soared in October on the news that China planned to implement new export controls on rare-earth materials. The idea being that the U.S. administration would be more likely to implement the kind of favorable actions (investments, purchasing agreements, and other support) toward USA Rare Earth as it did with MP Materials.

Additionally, if there is uncertainty about obtaining supplies from China, potential customers may opt to enter into agreements with USA Rare Earth instead.

What happened in November

However, the opposite can happen too. When China decided to pause the new export controls in early November, many investors pulled money out of the stock.

It's a frustrating situation for long-term investors who believe in the company's potential, but it's worth considering when evaluating entry points for buying the stock. On that note, the good news is that USA Rare Earth has experienced some positive developments recently, which should help derisk the stock.

Image source: Getty Images.

Derisking USA Rare Earth

As a reminder, the company's business model is somewhat back-to-front. It plans to manufacture rare-earth magnets at its Stillwater, Oklahoma, plant while building a supply chain of materials to feed it. While the company controls rights to a rare-earth mine, Round Top Mountain in Texas, and envisions developing it, USA Rare Earth " initially will be focused on partnering with ex-China suppliers and building or buying the capabilities we need to profitably manufacture high quality neo magnets in the United States."

To support this plan, the company bought Less Common Metals (LCM), a British manufacturer of rare-earth metals and alloys that gets its raw materials from outside China. This deal helps USA Rare Earth secure its supply of materials.

A few weeks later, LCM signed a supply agreement with Solvay and Arnold Magnetic Technologies Corporation, a deal that is expected to generate revenue for the company.

These events help derisk the stock and make it more investable for investors with a tolerance for risk, and a positive outlook on the company's potential to meet the U.S. need for a domestic supply of critical rare-earth materials.

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