Here's Why I Wouldn't Touch USA Rare Earth With a 10‑Foot Pole in This Critical‑Minerals Arms Race

If the critical-minerals arms race were a game of marbles (the "keepsies" version), and the U.S. and China were its players, then right now, the U.S. scant pile of marbled balls would pale in comparison to China's dominant heap.

Indeed, for many years now, the U.S. has formed an uncomfortable dependence on Chinese control of the rare earth supply chain. Nowhere is that more consequential than in permanent magnets -- those small components without which modern technology simply wouldn't work.

In its attempt to regain the upper hand, the U.S. government under Donald Trump has invested directly in mining companies that will not only help shore up the country's rare earth supply chain, but also supply these permanent magnets from their home turf.

One of these companies is USA Rare Earth (NASDAQ: USAR).

Investors, following the narrative above, have been relatively bullish on this pre-revenue rare earth miner. After all, the U.S. needs rare earths and magnets. Whoever doubts that it will open a mine and build a magnet factory -- without going broke -- is missing the point.

Recent reporting by Reuters, however, has made this too-perfect narrative a lot more complicated. And investors speculating on the future of USA Rare Earth would be wise to pay close attention.

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Every picturesque story deserves to be scrutinized

Again, the conventional wisdom on USA Rare Earth is that it has the potential to become a major player in the future of U.S. critical minerals, with possible backing by the U.S. government in the form of a $1.6 billion investment -- a $1.3 billion loan and $277 million in federal funding.

So far, so good.

This capital would help it build its mine (slated for a 2028 opening) and open its first magnet factory later this year. In exchange, the White House will get 16.1 million shares in USA Rare Earth, plus warrants for another 17.6 million more.

Sounds like a decent deal for USA Rare Earth, right? Well, there's a twist.

Apparently, the deal allows the U.S. government to keep its equity in USA Rare Earth, even if it never provides funding to the company. A true head-scratcher, this no-strings-attached equity could lead to dilution of USA Rare Earth stock -- if Washington were to exercise those 17.6 million shares -- without shareholders getting anything in return.

But Washington wouldn't back down from its promise, right? Surely it wants to shore up that supply chain of rare earth minerals.

Mining and processing critical minerals is certainly a federal priority, as is manufacturing permanent magnets, but the real question is, will that priority stay at the top of its list? If priorities shift -- say, with a war, or a budget fight -- capital could be delayed, or redirected, which wouldn't bode well for a pre-revenue company in this high-interest environment.

Consider this, too: USA Rare Earth is aiming to open its first mine in 2028. By that time, the U.S. will have had its midterm elections, and it will soon be deciding on its next president. Washington may be favorable to mining companies now, but a change in Oval Office could alter the terms of that deal.

The uncertainty around this deal, coupled with the capital-intensive task of opening a mine, is why I'm backing away from this mining stock for now.

Steven Porrello has positions in USA Rare Earth. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.