USA Rare Earth Gets a Government Boost -- Should Investors Be Excited or Cautious?

Rare-earth metals, which are needed for electric vehicles and other advanced technologies, have become a top priority for the Trump administration. China controls most of the world's rare-earth metals, and that's become a pain point in trade negotiations between the U.S. and China.

As a result, the Trump administration is looking for a way to prop up American rare-earth miners, and it just made possibly its biggest move yet in that direction, announcing on Monday that the Commerce Dept would take a stake in USA Rare Earth (NASDAQ: USAR). The stock soared on the news, jumping as much as 29.5% this morning.

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USA Rare Earth gets Uncle Sam in its corner

USA Rare Earth and the Dept. of Commerce signed a letter of intent this morning to provide $1.6 billion in funding, including $277 million in direct investment and $1.3 billion in loans under the CHIPS Act.

Additionally, USA Rare Earth has raised $1.5 billion in a PIPE (private investment in public equity), led by Inflection Point, a Special Purpose Acquisition Company that helped USA Rare Earth go public last year.

As part of that $277 million investment, the government is acquiring 16.1 million shares at $17.17 per share, a steep discount to where they trade today, and it's getting warrants connected to the $1.3 billion loan, which could be converted to approximately 17.5 million shares with an exercise price of $17.17.

The deal will give the government a stake of 8%-16% in the company, depending on whether the warrants are exercised.

What it means for USA Rare Earth

According to the announcement, the new capital is expected to accelerate USAR's objectives in line with a set of goals for 2030 that includes extracting 40,000 metric tons of rare-earth minerals and critical mineral feedstock from its Round Top deposit, processing 8,000 metric tons annually of heavy rare-earth elements and mixed rare-earth carbonate, as well as other production targets.

Investors should understand that USAR is still a pre-revenue, high-risk stock, and its Round Top mine isn't expected to come online until 2028.

The deal with the Commerce Dept. does strengthen its balance sheet as the company finished the third quarter with $257.6 million in cash, and its cash burn seems reasonable as it had a $21.1 million operating cash flow loss through the first three quarters of the year.

The investment from the government is certainly a positive for USAR and could pave the way to more government backing, but there's still a lot of uncertainty around the stock as it appears to be at least two years away from generating revenue.

Jeremy Bowman 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.