The U.S. Government Is Investing $1.6 Billion in USA Rare Earth. Does That Make the Stock a Buy?

Over the last year, rare-earth elements have come into focus for U.S. regulators, who have ramped up efforts to secure domestic supply chains to counter China's dominant position in mining and processing these crucial minerals.

This is part of the United States' broader mine-to-market strategy, where it aims to integrate mining, processing, alloying, and magnet manufacturing domestically. These magnets are crucial for defense and energy, and the U.S. is investing heavily in shoring up these supply chains. One company that stands to benefit is USA Rare Earth (NASDAQ: USAR). Here's what investors need to know.

USA Rare Earth secured key funding to grow its mine-to-magnet business

In January, USA Rare Earth announced a non-binding agreement with the U.S. Department of Commerce for up to $1.6 billion in funding. This funding includes $1.3 billion in senior secured loans, a low-cost form of government-backed debt, along with $277 million in direct funding. This is part of a broader capital raise by USA Rare Earth, which also includes $1.5 billion in private investor funding.

The money will help USA Rare Earth move forward on two key projects. The first one is for its manufacturing facility in Stillwater, Oklahoma, where it will manufacture sintered neodymium iron boron (neo) magnets. These magnets are essential for electric vehicle motors, wind turbines, and defense systems like missiles and fighter jets.

Its other project is the Round Top mine located in Texas. This mine is rich in "heavy" rare-earth elements, such as dysprosium and terbium, which are critical for the production of high-performance magnets. Last month, the company accelerated its timeline and expects to start commercial production by late 2028, two years earlier than previously estimated.

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It will take time for USA Rare Earth to build out its mining capabilities. In the meantime, it acquired Less Common Metals, a United Kingdom-based manufacturer of specialized rare-earth elements, for $100 million in cash and 6.74 million shares in November. This provides USA Rare Earth with the feedstock of strip cast alloy required for its Stillwater facility, giving it immediate magnet-making capabilities away from Chinese sources.

USA Rare Earth will ramp up operations this year

USA Rare Earth has no commercial operations or operating revenue at the moment, but that will change once its manufacturing facility in Oklahoma is up and running, with operations expected to begin in early 2026. Analysts project USA Rare Earth could earn $50 million in revenue this year, and $281 million in 2027.

Critical minerals have come into focus, and USA Rare Earth is one company poised to benefit from the domestication of these supply chains. Funding was a crucial component for USA Rare Earth, and the recent funding announcement from the U.S government is a big step forward.

Right now, USA Rare Earth is an early-stage, story-driven business that is making progress toward processing and mining these important magnets. The stock remains highly speculative at this stage, but for aggressive investors willing to wait, it has solid upside potential.

Courtney Carlsen has positions in USA Rare Earth. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.