Here's Why Shares in USA Rare Earth Slumped 23% in June

Shares in USA Rare Earth (NASDAQ: USAR) fell by 23% in June, according to data from S&P Global Market Intelligence. There are probably three unrelated reasons for the stock's decline this month. The first relates to a filing with the Securities and Exchange Commission (SEC) that might concern investors worried about a potential flood of selling by investors who had acquired their stock at lower levels. The second concerns the blacklisting of the company as part of China's export controls, and the third is a legal matter.

An overhang of shares for sale?

On June 5th, the company filed an S-3/A registration statement with the SEC covering the potential resale of 93,822,662 shares, representing 35.2% of the company's issued and outstanding common stock on a diluted basis.

The selling stockholders include shares acquired at much lower prices than the current stock price via business combinations, the conversion of preferred stock and warrants, share purchase agreements, and private investment in public equity (PIPE) transactions.

It's important to stress that there's nothing unusual about the filing, and the company was legally obligated to file it. Still, the potential overhang of shares for sale in such a large amount is bound to cause investor concern, particularly for a company that clearly needs investment to build magnet production and ultimately develop the Round Top mine in 2028.

China blacklists USA Rare Earth

Toward late June, China added USA Rare Earth and its peer MP Materials to its list of companies with restricted access to Chinese technology. While neither company buys or sells directly from China, the export restrictions also cover Chinese components used in final products that could be sold to USA Rare Earth and MP Materials. Consequently, they may need to reassess their supply chains, which could affect both companies at a time when they are looking to ramp up magnet production and acquire rare-earth processing technology.

MP Materials lawsuit against USA Rare Earth

Finally, MP Materials is taking legal action against USA Rare Earth, alleging that "USA Rare Earth Inc. stole its proprietary technology through a former employee," according to a Bloomberg report. While lawsuits are, unfortunately, not uncommon among peers in the U.S, the legal challenge is a distraction in the future.

Image source: Getty Images.

Where next for USA Rare Earth

The events in June highlight that, as exciting as the company's long-term prospects are, there's still a long way to go, with plenty of execution risk ahead, the potential for further shareholder dilution, and the risk of concerted selling pressure taking its toll on the stock.

That said, the company is one of the solutions to the challenge of securing a domestic supply of rare earth materials and magnets, and while that remains the case, it's likely to find favor among the government and investors.

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