MP Materials vs. USA Rare Earth: Which Rare Earth Stock Is the Better Buy?

Although it could be tempting to compare MP Materials (NYSE: MP) and USA Rare Earth (NASDAQ: USAR) in a zero-sum competitive game, the reality is that they are complementary companies. Probably the greatest difference between the two lies in their risk profiles: MP Materials represents the lower-risk/lower-return option compared to USA Rare Earth's higher-risk/higher-potential-return proposition.

Risk and return for MP Materials and USA Rare Earth

The market clearly understands the differing risk profiles, because on current valuations, USA Rare Earth trades at a significant discount to MP Materials. That disparity becomes apparent when looking at their forward valuations based on expected earnings and free cash flow in 2029 and 2030. Those will be key years for both rare-earth companies because by then, MP Materials plans to have its new "10X" magnet-producing facility in Northlake, Texas, in operation, and USA Rare Earth plans to have its rare-earth mine in Round Top, Texas, commissioned and producing.

One thing is clear from looking at Wall Street's expectations and implied valuations: Either USA Rare Earth is the buy of the century or the market is highly skeptical of its ability to get near its ambitious targets of revenue of $2.6 billion, earnings before interest, taxation, depreciation, and amortization (EBITDA) of $1.2 billion, and free cash flow (FCF) of $900 million.

Data source: Visible Alpha.

MP Materials advantages over USA Rare Earth

The discrepancy reflects several advantages MP Materials has over USA Rare Earth right now. First, MP Materials' rare-earth mine in Mountain Pass, California, is already in operation, while USA Rare Earth plans to have Round Top commissioned in 2028.

Second, MP Materials is significantly ahead in securing foundational customers. In fact, on the last earnings call, CEO Jim Litinsky said its magnet-producing Independence facility in Fort Worth, Texas, was "fully sold out between GM and Apple; it's possible that we'll fit another customer or two in there." As for the new 10X facility MP Materials is building, it has a 10-year agreement with the Department of Defense that establishes price floors for its products and includes a commitment "to ensure that 100% of the magnets produced at the 10X Facility will be purchased by defense and commercial customers with shared upside."

In essence, Washington is backstopping sales of the facility's full production capacity.

In contrast, USA Rare Earth has signed a distribution deal with Arnold Magnetic Technologies and is working on converting the production purchase orders and prototype purchase orders. The fact that the customers for these deals are unnamed and Stillwater is a newly producing facility (management expects to hit a run rate of 600 metric tonnes annually by the end of 2026) implies that the orders are relatively small.

All told, while both companies are pursuing a mine-to-magnet strategy, it's clear that MP Materials is significantly ahead and faces less operational risk than USA Rare Earth, which needs to demonstrate magnet production at scale, ramp up capacity, and commission Round Top. In a nutshell, that's why USA Rare Earth trades at significantly lower forward valuations.

Image source: Getty Images.

Why the two companies are complementary

The interesting thing about the two companies is that MP Materials is more focused on light rare-earth elements (LREEs) such as neodymium and praseodymium. USA Rare Earth focuses on heavy rare-earth elements (HREEs) such as dysprosium and terbium. HREEs are significantly more expensive than LREEs, lending weight to the idea that USA Rare Earth is arguably of greater strategic importance to U.S. domestic supply than MP Materials and has more upside potential if everything goes right.

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