Key Takeaways From USA Rare Earth's Big Deal

It's not only precious metals that have emerged as a prominent investing theme over the past year. Rare-earth stocks are also having their moment in the sun. USA Rare Earth (NASDAQ: USAR), for example, recently signed a major agreement with the U.S. government that many investors believe will help spur the company's growth.

Let's take a closer look at the new agreement and examine some of the more salient points.

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Government involvement, share dilution, needed funds

Lee Samaha: The January announcement is important because it de-risks the company's business model -- USA Rare Earth needs to fund the commercialization of the Round Top deposit in Texas, set to begin production in 2028 -- but it also adds political risk to the company's future via the 16.1 million shares to be issued to the U.S. government.

That stake leaves the company open to political interference and regulatory impacts, not least as administrations will inevitably change in the future.

That said, USA Rare Earth has one major factor in its favor to mitigate political risk: The Round Top deposit is the "richest known deposit of heavy rare earth elements," according to the company. The company aims to use its Hydromet facility in Colorado to separate rare-earth elements such as dysprosium (Dy) and terbium (Tb) -- essential for defense, electric vehicle, and renewable energy applications -- from rare-earth materials produced at Round Top.

Given that key peer MP Materials' Mountain Pass contains mainly light rare-earth deposits, it's clear that USA Rare Earth has a strategic importance to the need for the U.S. to secure a domestic supply of critical heavy rare-earth materials and magnets.

Scott Levine: There's no denying that the mining company is in a much more advantageous position as it now has access to about $3.1 billion in capital. It's essential, however, to recognize that current USA Rare Earth investors have now been subject to share dilution as a result of the recent deals -- yes, deals, as it wasn't only an agreement with the U.S. government that USA Rare Earth announced in late January.

In addition to the 16.1 million shares of common stock and approximately 17.6 million warrants that it agreed to issue to the Department of Commerce, USA Rare Earth also agreed to a $1.5 billion securities purchase agreement with Inflection Point, along with other investors, regarding a private investment in public equity (PIPE) transaction that totals 69.8 million shares issued at $21.50 per share. This represents a discount to the stock's closing price of $24.77 during the market session preceding the company's announcement.

On Jan. 29, USA Rare Earth announced the closing of the PIPE financing deal with Inflection Point. According to its press release, USA Rare Earth "intends to use the net proceeds from the PIPE to accelerate the build-out of its mine-to-magnet value chain, including the development and expansion of mining, processing, metal-making and magnet manufacturing capabilities, as well as for working capital and general corporate purposes."

What's a rare-earth investor to do now?

Starting with its investment in MP Materials last year, the U.S. government has demonstrated a concerted effort to secure the nation's supply of rare earths, so the recent investment in USA Rare Earth is hardly surprising. But the company's deal with the Department of Commerce is nuanced and requires potential investors to dig in further and examine the details.

Although share dilution may be disconcerting, investors should recognize that raising capital is essential, as the company isn't generating revenue. All in all, the recent deal is a net positive, and it'll be interesting to see how well the company progresses toward the start of commercial operations.

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