Why USA Rare Earth Stock Keeps Going Down
Key Points
The U.S. government has made a big investment in USA Rare Earth stock.
What the government will not do, however, is offer USA Rare Earth any price guarantees.
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USA Rare Earth (NASDAQ: USAR) stock soared to close nearly 8% higher on Monday, after the U.S. Department of Commerce announced it will extend a $1.3 billion CHIPS Act loan, and pay $277 million to acquire an equity stake in the miner of rare-earth metals.
The stock's gone nowhere but down ever since.
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Shares of USA Rare Earth tumbled 13% through 11:35 a.m. Thursday, wiping out the last of its gains from the Commerce announcement. The question is: Why?
Image source: Getty Images.
Buyer's remorse
As Reuters reports today, the reason is basically this: "The Trump administration is stepping back from plans to guarantee a minimum price for U.S. critical minerals projects, a tacit acknowledgment of a lack of congressional funding and the complexity of setting market pricing."
Last year, the U.S. Department of Defense invested $400 million in USA Rare Earth rival MP Materials (NYSE: MP). More than the investment, DOD also guaranteed MP that it would buy all the rare-earth neodymium-praseodymium the company could produce for at least $110 per kilogram -- and promised to keep that price floor in place for 10 years.
Sources now tell Reuters that the government has decided this was a mistake -- and that it will not extend similar price guarantees to other recipients of government investment, such as Lithium Americas (NYSE: LAC), Trilogy Metals (NYSEMKT: TMQ), or USA Rare Earth.
What this means for USA Rare Earth stock
Price guarantees turn into subsidies when market prices fall below the guaranteed price, and so the upshot of this news is: No subsidies for USA Rare Earth. If USA Rare Earth loses money, therefore, it... loses money, and the government won't act to prevent that.
Speaking of which, analysts forecast USA Rare Earth will lose $252 million this year.
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends MP Materials. The Motley Fool has a disclosure policy.
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