Here's Why USA Rare Earth Rocketed Higher by 72% in April

USA Rare Earth (NASDAQ: USAR) stock soared by 71.6% in April, according to data from S&P Global Market Intelligence. The move comes as a series of developments have helped derisk the company's business model and encouraged investors to believe it can achieve its aims as laid out earlier this year.

USA Rare Earth's business model

As a reminder, USA Rare Earth aims to become a vertically integrated mine-to-magnet rare-earth company. However, it's relatively unusual in that it relies on the downstream (magnets) part of the model to provide the earnings and cash flow needed to support commissioning the Round Top mine in 2028. The plan is to ultimately produce 8,000 tonnes per annum (tpa) of rare-earth elements, 27,500 tpa of metals and alloys (rare-earth elements account for only a portion of their total weight), and 10,000 tpa of magnets in 2030.

Management believes this will result in revenue of $2.6 billion and earnings before interest, taxation, depreciation, and amortization (EBITDA) of $1.2 billion, and free cash flow of $900 million in 2030. Those figures, in themselves, make USA Rare Earth an extremely attractive stock given its current market cap of $5.74 billion.

Derisking the business model in April

A plan is one thing, but delivering on it is another, and USA Rare Earth has plenty of risk along the way. However, the good news is that management is putting the company in a position to deliver, and April brought good news on that front.

• On April 9th, the company entered into a partnership, resulting in USA Rare Earth owning 12.5% of Carester SAS and giving USA Rare Earth the right to some of the company's rare-earth processing and separation technology output. As such, USA Rare Earth doesn't have to develop its own separation technology.
• On April 15th, the company announced its UK subsidiary, Less Common Metals, had completed its first Ytrium metal production – used in electronics, clean energy systems, medical imaging, lasers, superconductors, and advanced ceramics.
• On April 20th, USA Rare Earth announced a $2.8 billion agreement to acquire Serra Verde Group, the owner of a rare-earth mine and processing plant in Brazil, which includes heavy rare-earth elements Yttrium, Dysprosium, and Terbium.

Image source: Getty Images.

All together, these developments derisk its business model, as heavy rare-earth from Brazil can be separated by Carester, then made into metals by Less Common Metals, and finally turned into magnets at its new Stillwater facility. Meanwhile, the company can continue planning the commissioning of Round Top and developing its own metal-making capability in the U.S.

While the company still faces executional risk and it's far from clear where rare-earth magnet prices will be over the long term, these developments secure its supply chain as it works toward becoming a truly vertically integrated solution provide to the problem of ensuring a non-Chinese supply of rare-earth elements, metals, and magnets.

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.