Why USA Rare Earth Stock Gave Back Its Gains Today

USA Rare Earth (Nasdaq: USAR) stock soared to close up 8% Monday after the U.S. Department of Commerce announced it will extend a $1.3 billion CHIPS Act loan, and pay $277 million to acquire an equity stake in the miner of rare-earth metals used to manufacture magnets.

Logical, right? But here's the thing: At one point yesterday, USA Rare Earth stock was up closer to 30%, and it gave back almost all of that. Worse, the stock is down 4% through 12:10 p.m. ET today.

So why is USA Rare Earth stock falling?

Image source: Getty Images.

Details, please

Start with the details of what the government is doing. In total, Commerce is providing about $1.6 billion in funds to accelerate development of USA Rare Earth's Round Top rare-earth metals deposit, where the company aims to extract 40,000 tons of rare earth "feedstock" daily by 2030, and where it will process 8,000 metric tons annually of such heavy rare-earth oxides and concentrates as dysprosium (Dy), terbium (Tb), yttrium (Y), gadolinium (Gd), hafnium (Hf), erbium (Er), thulium (Tm), lutetium (Lu), ytterbium (Yb), holmium (Ho), gallium (Ga), and zirconium (Zr).

In exchange for this money, the government will immediately acquire 16.1 million shares of common stock and receive warrants to acquire a further 17.6 million shares, ultimately giving it as much as a 16% stake in the company.

For a stock with 139.2 million shares outstanding today, this means investors can expect to be diluted out of as much as 24.2% of their current ownership in the company.

Is USA Rare Earth stock a sell?

Factor in a separate PIPE transaction that will see 69.8 million shares issued to private investors in exchange for another $1.5 billion, and total dilution could approach 75%.

This, in a nutshell, is why investors are selling. USA Rare Earth stock will have a much sounder balance sheet after all these shares issue. Today's investors just won't own very much of the stock, or have much claim on any profits that eventually result.

Rich Smith 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.