USA Rare Earth Secures New Supply Deal: Investment Potential Explored

On November 18, 2023, USA Rare Earth (USAR) finalized the acquisition of Less Common Metals (LCM), a manufacturer specializing in rare-earth metals and alloys outside of China. This strategic move is part of USAR’s broader initiative to develop a fully integrated supply chain for rare-earth materials, essential in various high-tech applications. Shortly after the acquisition, USAR announced a partnership between LCM and chemical company Solvay to supply rare-earth metals to Permag, a prominent manufacturer of magnetic equipment.

The context surrounding rare-earth metals is increasingly complex as U.S.-China trade relations become strained. Recent shifts in policy have caused fluctuations in domestic rare-earth stocks. Although a temporary trade truce led to some recovery, concerns persist over China’s ongoing strategies, including the Validated End-User (VEU) system, which restricts access to these materials for U.S. military applications. This situation underscores the critical nature of USAR’s operations, positioning the company as a vital player in the domestic rare-earth sector.

Company Overview and Market Position

Based in Stillwater, Oklahoma, USA Rare Earth is focused on creating a comprehensive domestic supply chain for rare-earth elements and neodymium magnets. The company operates the Round Top deposit in West Texas, which contains 15 of the 17 rare-earth elements necessary for high-tech industries and green energy solutions. Its facility in Stillwater is designed for commercial-scale magnet production, and USAR aims to collaborate with local research institutions to enhance magnet technology and industrial capabilities.

Currently, USAR has a market capitalization of approximately $1.6 billion. Over the past year, its stock has appreciated by 15.36%, driven by heightened investor interest in rare-earth minerals, particularly for electric vehicles (EVs) and renewable energy technologies. However, in recent weeks, the stock experienced a significant decline, dropping 47.26% following the announcement of its third-quarter results.

Stock performance peaked at $43.98 on October 13, 2023, but has since fallen sharply, reflecting a 72.17% decrease from that high. Following the release of third-quarter results on November 6, USAR reported an adjusted loss per share of $0.25, a substantial increase from the $0.03 loss per share reported in the same quarter of the previous year. This figure also exceeded Wall Street’s expectations, which had anticipated a loss of $0.06 per share.

Operational Developments and Analyst Insights

Despite these challenges, USAR highlighted several operational advancements during its earnings call. The company has identified a flow sheet for the Round Top development process, with a pre-feasibility study scheduled for completion in the latter half of 2024. The Stillwater magnet facility is on track for commercial production, expected to commence in the first quarter of 2026. USAR has also signed a memorandum of understanding with Enduro Pipeline Services to produce U.S.-made neodymium magnets and entered a joint development agreement with ePropelled for sintered neodymium magnets.

Barbara Humpton, USAR’s new CEO, emphasized the company’s mission to create a fully integrated U.S.-based rare-earth materials and magnet platform that aligns with national priorities. Despite the operational strides, USAR’s financial outlook remains mixed. Analysts predict a further widening of losses, with per-share losses expected to reach $0.06 in the current quarter and approximately $0.65 for fiscal 2025.

Yet, optimism persists among Wall Street analysts. George Gianarikas from Canaccord Genuity recently reaffirmed a “Buy” rating on USAR’s stock, increasing the price target from $22 to $23. Furthermore, William Blair analysts initiated coverage with an “Outperform” rating, citing the potential benefits stemming from the company’s Texas mine development and the commencement of production at its neo magnet facility.

The consensus rating for USAR is currently a “Strong Buy,” with five out of six analysts favoring this outlook. The average price target of $22.75 indicates an 83% upside from current levels, while the highest target of $28 suggests a potential increase of 125.3%.

In the context of ongoing competition in technology and defense sectors between the U.S. and China, companies like USAR that focus on rare-earth metals could see significant opportunities for growth. The recent acquisition of LCM and the collaborations established may enhance USAR’s positioning in the market, making it a potentially attractive investment option as it navigates the complexities of the rare-earth supply landscape.