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USA Rare Earth secured major U.S. government and private funding, boosting its share price.
The deal supports domestic rare-earth magnet production and reduces reliance on China.
Management raised production and cash flow targets, but execution risks remain.
Shares in USA Rare Earth (NASDAQ: USAR) soared by more than 17% as of 1 p.m. today on news of a combination of U.S. government (USG) and private investment into the company. It helps derisk the company and secure a domestic supply of critical rare-earth magnets made from non-China-sourced materials, including from the Round Top deposit in Texas.
Under the deal terms announced today, the company will receive $277 million in Federal Funding and a $1.3 billion senior secured loan with a 15-year term at a rate of Treasury Rates plus 1.5% under the CHIPS Act.
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In return, the USG will receive $277 million in common stock comprising 16.1 million shares issued at $17.17 per share. In addition, the USG received 10% of the fully diluted shares outstanding (FDSO) through warrants on a pre-deal basis, representing 17.6 million shares at $17.17 per share.
Given that the share price, as I write, is about $29, the USG appears to have a good deal here, at least based on the initial reaction. In addition, the company secured $15 billion (69.8 million shares at $21.50) in a securities purchase agreement with Inflection Point and other investors.
It's a big deal for USA Rare Earth because it helps bridge its financing needs between starting and developing magnet production at its Stillwater facility this year and beginning commercial production at Round Top in 2028. As such, management wasted no time in updating the market on its commercial aspirations.
Management now expects to produce 8000 tonnes per annum (tpa) from Round Top in 2030, and 27500 tpa of metal (the gap will be filled by non-China sources), leading to 10000 tpa of magnets in 2030 -- more than double the previous estimate of 4800 tpa.
Image source: Getty Images.
It's a great deal for the company, and arguably the USG, but there are plenty of execution hurdles to cross before the company hits management's aim of $900 million in free cash flow in 2030.
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Lee Samaha 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.
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