Why USA Rare Earth Soared and Then Crashed This Week
Key Points
Management expects to generate significant profits and cash flow in a few years.
Investors were reminded of the political risk inherent in direct governmental involvement in the private sector.
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It was a wild week for rare-earth stocks, and the drama was led by USA Rare Earth (NASDAQ: USAR). Here's how the stock ended up down 10.9% by Friday morning.
USA Rare Earth soars and then slumps
The company started the week by announcing it had entered a Letter of Intent (LOI) with the U.S. Government, under which it would receive $277 million in Federal Funding and a $1.3 billion senior secured loan under the CHIPS Act. In conjunction with the LOI, the company arranged for a $1.5 billion private investment in stock from private investors "anchored by Inflection Point."
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The investment helps derisk USA Rare Earth's business plan (which involves producing magnets before developing the Round Top rare-earth deposit in Texas) and also helps secure a domestic supply of rare-earth magnets made with non-China-sourced materials.
Management immediately updated the market on its expectations for 2030:
- Mining and processing volume of 8,000 tonnes per annum (tpa) (including Round Top), compared to previously being contingent on a capital raise
- Metal making volume of 27,500 tpa compared to a previous estimate of 2,000 tpa
- Most importantly, magnet magnet-making capacity of 10,000 tpa compared to a previous estimate of 4,800 tpa.
- Financial targets of $2.6 billion in revenue,$1.2 billion in earnings before interest, taxation, depreciation, and amortization (EBITDA), and free cash flow of $900 million.
Why the stock fell afterwards
The announcement is positive, but there are two considerations here. First, speculation over a deal has been high since its peer, MP Materials, received investment as part of a public-private partnership announced in July. As such, there's no doubt a lot of speculative money was already in the stock waiting to sell on the news.
Image source: Getty Images.
Second, a Reuters article claimed that the Government is moving away from negotiating price floors with rare-earth companies. That signals a change of approach (the MP Materials deal did contain price floors), which, if consistent with ongoing policy, suggests a less accommodating environment for the company.
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Lee Samaha 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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