Key Points
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USA Rare Earth secured major government and private funding, which has de-risked its growth plans.
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Heavy rare-earth elements are critical and mostly controlled by China, and significant upside exists for the stock if management meets its ambitious targets.
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There’s a long way to go before the company meets its aims.
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If you’re thinking about investing in USA Rare Earth (NASDAQ: USAR), you need to consider the risk you’re taking on with this speculative stock. The company’s recent agreement with the U.S. government and its strategic positioning in providing rare-earth magnets for domestic consumption are the keys to understanding the investment case.
Let’s take a closer look.
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USA Rare Earth’s recent deal
USA Rare Earth’s agreement resulted in $277 million in federal funding, a $1.3 billion loan under the CHIPS Act, and $1.5 billion in private investment. All of this funding helps the company accelerate the execution of its plan to develop rare-earth magnet production at its Stillwater plant in 2026 and then begin commercial production at its Round Top deposit in Texas in 2028.
Image source: Getty Images.
Round Top, as opposed to, say, MP Materials‘ Mountain Pass, is rich in heavy rare-earth elements (HREEs), which command significantly more pricing than light rare-earth elements. China dominates theglobal marketfor rare-earth magnet production, contributing 94% of magnet manufacturing in 2024, but when it comes to HREEs, including dysprosium and terbium, its share of magnet manufacturing is 99%.
Why USA Rare Earth stock can make you rich
Management wasted no time setting financial targets after the deal was struck, and investors now have useful parameters with which to value the stock.
If management hits its projections, the stock will start to look extremely undervalued. Throw in a positive outlook for HREE pricing, given the paucity of non-Chinese supply and HREE’s critical importance to the defense, renewable energy, and electric vehicle industries, and the stock could make you rich.
USA Rare Earth Metric
Financial Target by 2030
Valuation Metric
Valuation Based on Current Market Cap*
Revenue
$2.6 billion
Price-to-sales
1.7
Earnings before interest, taxation, depreciation, and amortization (EBITDA)
$1.2 billion
Enterprise value-to-EBITDA
3.6
Free cash flow (FCF)
$900 million
Price to FCF
4.8
Data source: USA Rare Earth presentations. *Based on market cap and enterprise value (market cap plus net debt) of $4.34 billion.
What USA Rare Earth needs to do to make the numbers
But the company needs to execute on its plan to develop a world-class magnet manufacturing facility, to commercially develop Round Top, and to secure non-Chinese sources of rare-earth elements for Stillwater, even after Round Top starts production. While all of this is going on, shareholders will be hoping there’s no need for future funding, which could dilute their existing claim to earnings and cash flow.
In a nutshell, the stock is attractive and helps address a critical need for HREE in U.S. manufacturing, but there’s a long way to go before it hits its goals.
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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.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
