Key Points
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The Department of Defense’s $400 million investment in MP Materials set off a wave of enthusiasm across the industry.
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The government’s move aims to boost domestic rare earth production, which is currently dominated by China.
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Unlike MP Materials, which already operates an active mine and generates revenue, USA Rare Earth is pre-revenue with negative shareholder equity.
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Shares of USA Rare Earth (NASDAQ: USAR) jumped this week, up from last Thursday’s close at 1 p.m. ET for the Fourth of July holiday by 10.4% as of 1:30 p.m. ET Friday. The rise came as the S&P 500 (SNPINDEX: ^GSPC) and Nasdaq-100 both gained 0.6%.
USA Rare Earth stock jumped — alongside most of the critical mining industry — after MP Materials announced yesterday it had inked a major deal with the Department of Defense (DoD).
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A big move for domestic mining
The Trump administration, which has been considering direct investments in companies that mine materials essential to U.S. national security, pulled the trigger, taking a $400 million stake in rare earth mining company MP Materials.
Rare earth materials are essential in technologies at the core of many key weapon systems, and at present, the vast majority of them are mined in China. MP was chosen because it owns the only operational rare earth mine in the U.S. Now its largest shareholder is the Department of Defense, which took a more than 15% stake, almost twice that of the next largest shareholder, CEO James Litinsky.
Miners and refiners across the industry saw their stock boosted by the news in hopes that more deals like it would be coming.
Image source: Getty Images.
USA Rare Earth is still high risk
There are no guarantees that the Pentagon will follow with more deals such as this, and even if it does, there’s certainly no guarantee that USA Rare Earth would be selected. Investors are running up the stock on pure speculation, which smart investors should always be wary of.
And while on its face, the two companies may appear similar, MP Materials has an active mine and brought in over $60 million in revenue last quarter. USA Rare Earth has no sales and negative shareholder equity, as it is still building out its operations.
You should only consider USA Rare Earth stock if you understand this is a high-risk, pre-revenue company.
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Johnny Rice has no position in any of the stocks mentioned. The Motley Fool recommends MP Materials. The Motley Fool has a disclosure policy.
