Should You Buy USA Rare Earth While It's Below $25?

USA Rare Earth (NASDAQ: USAR) is one of the hottest speculative growth stocks, but even its shares have pulled back amid rising market uncertainty. Worse yet, even if market sentiment improves, high volatility may continue.

Why? As a pre-revenue company, this rare-earth mining and processing start-up is many years away from generating significant revenue, let alone steady profits. While still a very risky investment, recent news suggests a strong likelihood that the bull case will play out.

With this in mind, instead of heading for the hills if shares pull back, you may want to seize the opportunity.

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USA Rare Earth and its $4 billion gambit

As the U.S. government seeks to reduce China's near-monopoly on rare-earth metals, several companies, including USA Rare Earth, have stepped up to capitalize on incentives to fast-track the buildout of rare-earth mining and processing infrastructure stateside.

USA Rare Earth's plan is to develop a deposit site, known as Round Top, located in Sierra Blanca, Texas. The Round Top site contains 15 of the 17 rare-earth elements. The company is also constructing a rare-earth magnets production facility in Stillwater, Oklahoma. Alongside these buildout plans, USA Rare Earth has also acquired an existing producer of rare-earth metals, Less Common Metals .

The total estimated cost for this project is $4.1 billion, but after raising around $1.5 billion in additional equity and receiving a letter of intent for $1.6 billion in government funding and loans, the company has made significant progress toward securing full funding.

With around $343 million in cash already on hand, the company needs around $650 million in additional funding. This suggests future shareholder dilution, but given its current $5.1 billion market cap, it will be relatively minimal.

The best approach for long-term investors

For USA Rare Earth, there is substantial potential payoff from its development plans. Thanks to the recent financing progress, management has pulled forward its long-term projections. Currently, its forecasts call for the company to generate $2.6 billion in annual revenue and $1.2 billion in annual earnings before interest, taxes, depreciation, and amortization (EBITDA) by 2030.

Currently, many leading mining companies trade at enterprise value/EBITDA ratios in the 9x to 10x range. This suggests USA Rare Earth could one day have an enterprise value of $12 billion. Assuming the company uses its future cash flow to pay down federal loans, it's reasonable to expect this stock could at least double in price over the next few years.

That said, it may not be a straight shot to the low $40s per share. Given the multiyear time frame, stock market volatility, and/or a lack of company-related news, the stock could experience extended periods of weakness. However, in the long run, this could prove favorable.

If shares dip, the opportunity to accumulate a position that could eventually be worth many times that entry price could emerge. Yes, it's no slam dunk that actual results will meet projections. For instance, there is uncertainty over whether the U.S. will provide price support. Nevertheless, assuming you treat this as a small, speculative position, consider shares worthy of a long-term buy at prices below $25 per share.

Thomas Niel 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.