Is USA Rare Earth Under $20 a Bargain or a Trap?
Key Points
USA Rare Earth has lots of promise.
It has little revenue and no profits, making it hard to value the company.
Shares of USA Rare Earth (NASDAQ: USAR) currently trade right around $18. That's more than 50% below its 52-week high. Despite that sell-off, I don't think shares of the rare-earth miner are a bargain. Here's why.
Valued on promise, not profits
USA Rare Earth has grand ambitions. The company aims to become a global leader in supplying critical minerals and advanced materials, and in producing rare-earth elements, oxides, metals, and magnets. It's building a fully integrated mine-to-magnet business that already includes a deposit in Texas and manufacturing operations in Oklahoma. The company recently took a major step toward becoming a global rare-earth leader by agreeing to acquire Serra Verde Group for $2.8 billion. It's also investing in expanding its processing capabilities through its recent investment in Carester. Additionally, it plans to build a new rare-earth metal and magnet manufacturing operation in South Carolina.
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After the 50% slump in its share price, USAR has a $4.5 billion market cap. That's a lot for a company that only generated $5.8 million of revenue during the second quarter. Meanwhile, it reported a $46.3 million loss from operations during the period and used $56.9 million in cash. On a more positive note, it ended the period with $1.5 billion in cash, giving it lots of breathing room.
It's hard to accurately value a company that's basically pre-revenue and years away from generating profits. Instead, you're buying into the promise that it can build a global leader in critical metals. There's certainly a lot of promise here, from the Serra Verde deal to a recent agreement with the U.S. Department of Commerce for up to $1.6 billion in federal funding to help support its growth plans. However, the company faces significant execution risk (Serra Verde integration and construction of the South Carolina facility) and financing risk (Serra Verde dilution and potential additional stock issuances). If USAR encounters any major setbacks, its share price could decline further. That's why it's not the best mining stock to buy if you're looking for a true bargain.
Matt DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.