Why USA Rare Earth Stock Soared, Slumped, and Ended Up 13% Higher in October

Welcome to the wild ride that is USA Rare Earth (NASDAQ: USAR) stock. The stock rose 13.1% in October, according to data provided by S&P Global Market Intelligence. While that sounds relatively sedate, a quick look at the chart below reveals a much more exciting story. Here are the details behind it.

USA Rare Earth stock price chart

The chart reveals the impact of the political developments impacting the rare-earth market and USA Rare Earth in particular. More on that in a moment, but first, here's why the stock burst higher in early October.

As a reminder, the company's strategy is first to start producing rare-earth magnets at its Stillwater, Oklahoma, facility in 2026. Meanwhile, according to its Securities and Exchange Commission (SEC) filings, it will be "focused on partnering with ex-China suppliers and building or buying the capabilities we need to profitably manufacture high quality neo magnets in the United States."

The company also controls the mining rights to Round Top Mountain, West Texas, an above-ground mineral deposit containing numerous rare-earths metals, including gallium (used in semiconductors), beryllium (used in alloys serving the aerospace, defense, and nuclear industries), and lithium (used in energy storage in electric vehicles and consumer electronics, among others). Its long-term plan is to develop Round Top Mountain as a source of rare-earth materials for its magnet production.

Image source: Getty Images.

To that end, the company agreed to buy the U.K.'s LCM for $100 million in cash and 6.74 million shares of USA Rare Earth in late September. LCM doesn't source rare-earth materials from China, and is a producer of "rare earth metals and both cast and strip cast alloys," which can supply products to the Stillwater facility.

Political developments are driving the share price

China dominates the processed rare-earth and rare-earth magnet market, accounting for 90% of the world's processed rare-earth elements. That position gives it significant leverage in trade negotiations and is encouraging the U.S. to take action (including investing directly in rare earth companies such as MP Materials).

As such, when China expanded its controls over rare-earth exports in early October, shares like USA Rare Earth and MP Materials soared in anticipation of renewed action by the U.S. to secure rare-earth materials and magnet supplies by taking action favorable to domestic suppliers.

However, that optimism faded after the U.S. and China struck trade deals in late October that included pausing the expanded rare-earth controls for a year.

Image source: Getty Images.

What's next for USA Rare Earth

Whether investors like it or not, the stock is being traded as a proxy for U.S.-China relations, specifically over trade in rare-earth materials and magnets. As such, it's more of a speculative stock, and given the recent history and China's use of leverage over the issue, it wouldn't be surprising to see more stock price volatility ahead.

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