Can USA Rare Earth Stock Beat the Market?

Investors in USA Rare Earth (NASDAQ: USAR) have had a wild ride since the company went public in March, largely due to ongoing speculation about the possibility that the federal government will step in to support or invest in a company that could significantly contribute to ensuring a domestic supply of rare-earth magnets that are critical for U.S. industry. The stock could outperform the market, but here's what you need to know before investing.

A rare growth strategy

Typically, mining and materials companies develop their deposits and then build the facilities to process the extracted materials, or do those things concurrently. However, USA Rare Earth is taking a somewhat unusual approach. Its ultimate plan is to operate on a "mine to magnet" basis. However, it's constructing a magnet-producing facility in Stillwater, Oklahoma, before proceeding with the development of its Round Top deposit in Texas.

According to a recent press release, "Round Top is the United States' richest known deposit of heavy rare earth elements, gallium, and beryllium," and management plans to begin commercial development of it in late 2028. Meanwhile, the company plans to have the Stillwater plant commissioned and ready to commercially produce magnets in 2026. For reference, gallium is not a rare-earth metal, but is used in semiconductors critical for high-speed/high-frequency applications, and beryllium (also not a rare-earth metal) is often used in structural components in space and defense technologies.

What USA Rare Earth needs to do in 2026

Given this strategy, it will be essential for USA Rare Earth to ensure a non-Chinese supply of materials for the Stillwater facility. Its recent acquisition of the U.K.'s Less Common Materials (LCM), a rare-earth metal and alloy manufacturer that sources materials outside of China, is a key element in its plans. Pursuant to the acquisition in November, LCM signed a deal to supply Solvay and Arnold Magnetic Technologies with rare-earth materials. The deal will help USA Rare Earth generate revenue.

Image source: Getty Images.

Putting all this together, USA Rare Earth needs to successfully start commercial production at Stillwater in 2026 and complete a pre-feasibility study on the Round Top deposit in the third quarter.

The underlying story

While management will pursue this strategy, and indeed is making good progress on it, the reality is that this is a stock that will trade on speculation over the possibility of the U.S. government -- and specifically, the Department of Defense -- investing in or supporting the company in a similar manner to the deals done with MP Materials in 2025.

It's a feasible outcome, as China's dominance of the rare-earth magnet market and the current state of international trade relations give the government an incentive to take such actions.

Image source: Getty Images.

That said, there's no guarantee of any sort of deal, and the company hasn't announced any deals to supply companies with magnets. There are also execution risks surrounding Stillwater, and we're still waiting to see if the Round Top feasibility study indicates commercial viability for the deposit.

All of this leaves USA Rare Earth as a high-potential-reward but high-risk stock. It wouldn't be a suitable core holding, but it could work at the highly speculative end of a portfolio for very patient and risk-tolerant investors.

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