Is USA Rare Earth Stock a Once-in-a-Decade Rare Earth Opportunity?
Key Points
USA Rare Earth has yet to begin either commercial production of rare earth magnets or elements from the Round Top deposit.
Its focus on high-value heavy rare earth elements gives it significant upside potential, but there's plenty of execution risk along the way.
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USA Rare Earth (NASDAQ: USAR) recently updated investors on its medium-term plans as it enters a multiyear execution period, backed by U.S. government and private investment. Buying the stock is not a straightforward investment proposition, as many dynamic factors are at play. Still, the stock will definitely interest investors who like to manifest strongly held political views. Here's why.
Heavy and light rare earths
The odd thing about the company is that it's arguably more strategically important than its peer, MP Materials (NYSE: MP), yet it's not supported with the same favorable terms.
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USA Rare Earth's Round Top deposit is a rhyolite laccolith rich in crucial heavy rare-earth elements (HREE), such as dysprosium and terbium. Meanwhile, MP Materials' Mountain Pass is a carbonatite deposit containing light rare earth elements (LREEs), notably neodymium and praseodymium.
Image source: Getty Images.
HREEs trade at significantly higher prices than LREEs, with USA Rare Earth management arguing that they trade at 10x-100x the price of LREEs. HREE prices reflect their scarcity, their crucial role in missiles, drones, and electric vehicles, and China's near-total monopoly on them. LREEs are high-volume rare earths that are easier to procure in the West.
Comparing USA Rare Earth and MP Materials
Investors may be wondering why MP Materials received a deal involving 10-year pricing-floor commitments for its NdPr (neodymium-praseodymium) products and a Department of Defense agreement ensuring that "100% of the magnets produced at the 10X Facility will be purchased by defense and commercial customers, with shared upside," while USA Rare Earth only received government and private investment as well as loans.
One answer lies in the fact that Mountain Pass is operational now and MP Materials is producing magnets, with a significant ramp-up when the 10X Facility is built. In comparison, USA Rare Earth plans to start producing magnets at its Stillwater facility in due course, while Round Top is expected to begin commercial production in late 2028.
What you have to believe to buy USA Rare Earth stock
The contrast with MP Materials highlights the lack of pricing floors for USA Rare Earth, the risks inherent in commercializing Round Top, and the risks around developing Stillwater for commercial use. All of them speak to the potential for more dilution for existing shareholders if and when the company requires more funding.
On the other hand, management plans to generate $900 million in free cash flow by 2030. In addition, the issue of the critical importance of HREEs and the difficulty of securing non-Chinese HREEs isn't going away anytime soon.
All of which makes USA Rare Earth an attractive investment, but only for enterprising investors willing to take on some risk to capture its upside potential.
Should you buy stock in USA Rare Earth right now?
Before you buy stock in USA Rare Earth, consider this:
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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool recommends MP Materials. The Motley Fool has a disclosure policy.
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