This Is My Biggest Worry About USA Rare Earth Stock

The recent agreement between the U.S. and China with respect to rare-earth materials has cooled tensions between the nations for the time being, yet investor interest in these critical minerals remains strong as it has for the past several months. One stock, in particular, that has drawn considerable interest is USA Rare Earth (NASDAQ: USAR) since the company is nearing completion of its rare-earth magnet production facility in Oklahoma.

But the potential for USA Rare Earth stock to flourish in the near future can't be acknowledged without recognition of one glaring concern.

Image source: Getty Images.

Despite the attraction, this risk may repel investors from the rare-earth magnet stock

While MP Materials (NYSE: MP) receives a hefty share of rare-earth materials investor interest due to its industry-leading position among U.S. companies, USA Rare Earth has gained more notoriety as it nears completion of its rare-earth magnet production facility in Oklahoma -- a facility that is expected to commence operations early in 2026.

Another factor feeding the bull case for USA Rare Earth is the company's report that it has signed 12 memoranda of understanding (MoU) and joint development agreements (JDA) with potential customers. In fact, the company stated in its second quarter 2025 financial results press release that it has "the potential to sell out our first 1,200-ton production line prior to commissioning its full capacity."

However, what gives me pause are the risks that USA Rare Earth faces in possible delays with the development of the facility and challenges it may encounter with the operation of the facility once it's complete. This could lead potential customers to competitors like MP Materials, which already has a rare-earth magnet production facility up and running in Texas.

Plus, there are private companies also working to produce rare-earth magnets. Vulcan Elements, for example, announced last summer that it's partnering with Energy Fuels to expand rare-earth magnet production. Energy Fuels expects to supply Vulcan Elements, which operates a rare-earth magnet production facility in North Carolina, with both light and heavy rare elements before the end of 2025.

I'm not dropping USA Rare Earth from my watchlist

Although I have some concerns about USA Rare Earth, I'm not completely writing it off. There's a strong bull case to make with this mining company's stock even though the company may encounter some challenges in the near term as it proceeds with development of its Oklahoma facility. Taking this into account, however, I'd like to see the stock pull back a little further from its current level (after its 70% rise year to date) before deciding to start a position since it represents a higher degree of risk.

Scott Levine has no position in any of the stocks mentioned. The Motley Fool recommends MP Materials. The Motley Fool has a disclosure policy.