Most investors know most stocks are only going to dish out average gains. Every now and then, though, a prospect surfaces that seems like a potential game changer. Indeed, it may even turn a relatively small investment into a seven-figure sum.
The risks associated with such upside potential, of course, are just as great -- and that's the conundrum anyone eyeing USA Rare Earth (USAR 6.40%) right now is facing. The world needs what it's got. The math, however, may or may not make enough risk-adjusted sense in the long run.
USA Rare Earth's elevator pitch
Just as the name suggests, USA Rare Earth is in the rare earth minerals business. Once its facility in Stillwater, Oklahoma begins operations sometime in the first half of this year, the pre-revenue company will be able to annually manufacture 5,000 tons of rare earth magnets, putting it in a business that USA Rare Earth President Thayer Smith says is poised to triple in size within 10 years.
NASDAQ: USAR
Key Data Points
It's not just a manufacturing facility, though. Indeed, the company's prized asset is its property in west Texas -- called Round Top -- that's still being prepared for mining. While any such estimate should be taken with a grain of salt (since no one ever knows for sure until the ground's actually being dug up), some have suggested there are tens of millions of tons of rare earth elements waiting to be extracted at the site, plus enough lithium hydroxide -- used in electric vehicle batteries -- to produce 20,000 tons of it every day for over 100 years.
Another miner, Texas Mineral Resources, has previously suggested that the resource could generate on the order of $400 million per year, (at 2019's prices), translating into more than $8 billion worth of revenue for the mine's expected useful lifespan of 20 years. Not bad.
The counter-argument
The conundrum? It's going to require at least a couple more years and a few hundred million dollars just to start production at Round Top. Moreover, while it's encouraging to know that USA Rare Earth has access to liquidity if-and-when it needs it, the fact that it's arranged for up to $1.3 billion worth of loan-based funding from the federal government plus another $1.5 billion in eventually dilutive private funding speaks volumes about the sort of costs that have been and will be involved here.
Image source: Getty Images.
In the meantime, USA Rare Earth's market value currently stands in excess of $4 billion. It seems much of any long-term upside is already reflected in this stock's price, rather than waiting to be priced in by developmental progress or actual revenue.
The cons outweigh the pros
This isn't to suggest that USA Rare Earth won't eventually turn a profit, nor is it so say it won't produce gains for patient shareholders; there's most definitely a market for rare earth elements, for which the United States is uncomfortably dependent on China right now; a domestic supplier would be welcomed.
Given the historic difficulty and required time and cost involved in developing any new mine, however -- not to mention the pre-revenue company's already-frothy market cap -- there's arguably not enough upside and too much risk here to consider USAR the sort of millionaire-making prospect that investors seek. It would take a massive upfront investment in this name to grow to a million bucks in the foreseeable future -- and too much can happen in the meantime.
Bottom line? If a big score in a relatively short amount of time is your goal, you're better off considering something else.
