Should You Ignore MP Materials and Buy This Rare-Earth Stock Instead?

It's MP Materials (NYSE: MP) versus USA Rare Earth (NASDAQ: USAR) in the great debate over which is the leading rare-earth company that will solve the problem of securing a domestic supply. The two companies have key differences, which means they will work differently in your portfolio. Here's why, and a suggestion for how to invest in the sector.

The key differences between MP Materials and USA Rare Earth

Both companies have received substantive backing from the U.S. government, and understandably so. China dominates the rare-earth market, and given the critical importance of rare-earth magnets to the global economy, it's a matter of national security to ensure that the U.S. defense and manufacturing sectors have access to domestically produced, non-China-sourced rare-earth magnets.

Image source: Getty Images.

According to USA Rare Earth CFO William Steele, "China dominates well in excess of 90% of the market, in fact, up to 99% of certain rare-earth going forward." China has an even more dominant position in the heavy rare-earth elements (HREE), with USA Rare Earth CEO Barbara Humpton noting on a shareholder call in April: "Dysprosium and terbium generally represent 20% of global rare-earth volume, but over 90% of the value. And critically, China today processes nearly 100% of these heavy rare-earth."

All of which leads to the key differentiator between MP Materials and USA Rare Earth. The former focuses on light rare-earth elements (LREE) such as neodymium (Nd) and praseodymium (Pr). In contrast, USA Rare Earth focuses on heavy rare-earth elements such as dysprosium (Dy) and terbium (Tb).

In general, LREEs are more abundant than HREEs, and the latter command much higher pricing. While China dominates both markets, it has a chokehold on the HREE market, as Humpton's comments above allude to. In addition, HREE magnets are more expensive and technically demanding to produce, and HREEs are also harder to source.

That makes USA Rare Earth arguably more strategically important than MP Materials, with greater upside potential, but it also makes it a far riskier stock in terms of operational execution.

MP Materials is more advanced in its business model

USA Rare Earth is also riskier: While both companies are pursuing a mine-to-magnet strategy, MP Materials is significantly more advanced. It already produces rare-earth magnets at its Fort Worth, Texas, facility and has two foundational customers: Apple and General Motors. In addition, its LREE-rich Mountain Pass is already operational and supplying elements. Furthermore, MP Materials has already begun construction of its new "10X" facility in Northlake, Texas. The facility is a key part of the company's growth plans, and also a cornerstone of the public-private partnership with the Department of Defense.

In contrast, USA Rare Earth entered magnet production in the second quarter of this year, with its first magnet sales expected by year-end. As for the "mine" part of the mine-to-magnet strategy, the company has secured a 100% ownership interest in the HREE-rich Round Top deposit in Texas. It is targeting commercial operations in late 2028.

The risks are reflected in valuations

In a nutshell, USA Rare Earth is a higher-risk, higher-return proposition than MP Materials, and that's reflected in the valuations implied by Wall Street analysts' estimates for the stocks. As you can see below, the additional risk at USA Rare Earth is reflected in its significantly lower valuation based on analyst consensus.

Data source: Visible Alpha Wall Street Consensus.

Note that these valuations project a lot into the future and assume both companies execute on their growth plans.

USA Rare Earth and MP Materials

The answer to the question in the headline is "no." However, that's not because MP Materials is a noticeably better investment than USA Rare Earth. Instead, it's a significantly different investment proposition that will suit more conservative investors. At the same time, USA Rare Earth offers greater upside potential to offset the significantly higher risk of ramping up HREE magnet production, commissioning Round Top, and developing customer relationships.

If forced to choose, I think USA Rare Earth is better on a risk/reward basis, but the best strategy for rare-earth bulls may well be to buy both in a diversified portfolio.

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