Why Did USA Rare Earth Stock Pop, Then Drop?

Key Points

• USA Rare Earth will buy Britain's Less Common Metals for $100 million.

• The acquisition will transform USA Rare Earth -- and give it some revenue a year before it would otherwise have it.

• USA Rare Earth will still remain unprofitable for years.

• 10 stocks we like better than USA Rare Earth ›

USA Rare Earth (NASDAQ: USAR) stock, one of a handful of start-up companies attempting to jump-start rare earth oxide mining and rare earth magnet manufacturing in the U.S., soared nearly 10% in early trading Monday before giving back all its gains.

As of 1:25 p.m. ET, USA Rare Earth stock is basically flat -- even down a bit less than 0.1%.

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Image source: Getty Images.

USA Rare Earth's big buy

USA Rare Earth announced it will buy British Less Common Metals, or LCM, in an effort to make itself "the leading scaled rare earth metal and alloy manufacturer outside of China with leadership in samarium, samarium cobalt, and neodymium praseodymium metals and alloys."

S&P Global Market Intelligence describes LCM as "a world-leading company that specializes in the manufacture and supply of complex alloy systems and metals, with a focus on rare earth metals." LCM isn't a big company, doing only $17.4 million in annual revenue according to S&P Global -- but at least it's bigger than USA Rare Earth, which produces no revenue at all.

USA Rare Earth will change that, however, by paying $100 million to acquire all of LCM's common stock.

Is USA Rare Earth stock a buy?

USA Rare Earth has almost no debt, and $120 million in cash, almost all of which it will spend on this acquisition. It anticipates raising $125 million in new cash from an existing investor.

Post-acquisition, USA Rare Earth will be selling for almost exactly 100x trailing sales (all of these sales will come from LCM).

True, that valuation may drop to around 27x sales next year, when USA Rare Earth begins selling rare earths, but that's still quite a pricey valuation. With no profits forecast until 2028, I still see USA Rare Earth stock as a sell.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends S&P Global. The Motley Fool has a disclosure policy.