Here's Why USA Rare Earth Stock Crashed in March
Key Points
USA Rare Earth is preparing to ramp up production of rare earth magnets.
The company is now the sole beneficiary of the Round Top deposit.
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Markets move in mysterious ways. Just ask shareholders in USA Rare Earth (NASDAQ: USAR), who watched on as the company's stock declined by 19.9% in March, according to data from S&P Global Market Intelligence. The company made several positive announcements throughout the month. Still, the broad-based market sell-off, driven by events in the Persian Gulf, prompted investors to shift to so-called haven investments and away from more speculative investments like USA Rare Earth.
USA Rare Earth
The company is certainly a high-risk and high-reward investment. The upside potential from its potential to help provide a domestic supply of critical rare-earth magnets sourced from U.S. non-China sourced materials. Moreover, as outlined previously, USA Rare Earth is uniquely positioned as its Round Top deposit (which it plans to begin commercial production from in 2028) is rich in heavy rare-earth elements (HREEs).
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Heavy rare-earth magnets tend to command a pricing premium due to their scarcity and their critical role in the defense industry, including drones and missiles.
The downside stems from execution risk in producing magnets and developing Round Top, as well as from the potential dilution of existing shareholders' interests should the company require additional funding.
What happened in March
Many of these factors came to the fore in March. For example, at the start of the month, the company acquired an 18.6% interest in the Round Top deposit, making it the 100% beneficiary of the project. That's good news because it reduces the risk that the previous minority owner would struggle to raise the finance necessary to invest in Round Top. However, the company paid for it with 3,823,328 shares of USA Rare Earth common stock, therefore diluting existing shareholders.
In addition, toward the end of the month, management announced it had successfully commissioned a commercial magnet production line at its facility in Stillwater. As such, it's ready to start delivering on customer orders as it ramps up production. It's a key step in the company's plan to then develop Round Top.
Moreover, it's reasonable to assume that the escalating conflict in the Persian Gulf is only highlighting the need to secure a domestic supply chain for materials, including heavy rare-earth magnets, for the defense industry.
Where next for USA Rare Earth
On balance, there were more positives than negatives in March. Still, the stock's sell-off highlights the risk of buying a speculative stock that isn't expected to generate any net income until 2030, according to the Wall Street analyst consensus. That said, if you were comfortable with the risk-reward calculation before March began, the stock should be more attractive now, as the price and risk are lower.
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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.
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