The United States faces a huge supply chain vulnerability regarding rare-earth elements. That's because China controls up to 90% of the processing of these rare-earth elements, according to research by The Motley Fool. The federal government has taken an active role in bolstering rare-earth mining and processing and has invested in two companies, MP Materials (MP +9.39%) and USA Rare Earth (USAR +13.21%), to bolster its capabilities.
The two companies are expanding their capabilities for mining and processing rare-earth elements and manufacturing refined magnets, which are critical for defense, aerospace, and technological applications. If you're considering investing in the budding U.S. rare-earth industry, one of these companies stands out as a better investment right now.
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The U.S. government has a vested interest in MP Materials and USA Rare Earth
MP Materials and USA Rare Earth are two companies that have come onto investors' radar after the U.S. government provided massive financial backing and support. Last year, MP Materials entered into a historic agreement with the U.S. Department of Defense (DoD) to help accelerate the build-out of its second domestic magnet facility (the 10X facility) and its mining capabilities.
As part of the agreement, the DoD has agreed to a 10-year purchase agreement for MP Materials' neodymium-praseodymium (NdPr) products at $110 per kilogram, providing the company with a price floor that insulates it from foreign entities that may try to undercut its prices. NdPr is a rare-earth alloy used to manufacture powerful permanent magnets crucial to defense and technology systems.
The U.S. government has also agreed to purchase 100% of the magnets produced at MP's 10X facility for 10 years following the facility's construction. In return, the DoD agreed to purchase $400 million in shares of the rare-earth company and is now its largest shareholder, holding 15% of the shares outstanding.
NYSE: MP
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In January, USA Rare Earth also reached a $1.6 billion deal with the U.S. Department of Commerce through the CHIPS Act, which will enable the company to build out its own "mine-to-magnet" supply chain. As part of the agreement, USA Rare Earth will issue 16.1 million common shares to the U.S. Department of Commerce and roughly 17.6 million warrants.
MP Materials has this major strategic advantage
MP Materials has a huge first-mover advantage over USA Rare Earth. That's because MP owns and operates the Mountain Pass mine in California, the only active, large-scale, rare-earth mining and processing site in North America. This established infrastructure allows the company to hit the ground running and generate revenue quickly as it ramps up its operations.
In the first quarter, MP Materials produced a record 917 metric tons of NdPr and sold 1,006 metric tons, representing year-over-year increases of 63% and 117%, respectively. The company's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) improved from negative $2.7 million last year to positive $36.6 million. Meanwhile, its generally accepted accounting principles (GAAP) net loss shrank from $22.7 million to $8 million year over year.
USA Rare Earth is still in its early stages and is spending big on acquisitions to get its mining and processing business up and running. Over the past several months, it has acquired Serra Verde Group for $2.8 billion and Less Common Metals for about $220 million. In addition, the company aims to develop the Round Top deposit in Texas and expand its processing capabilities with its facility in Stillwater, Oklahoma and a newly announced facility in Blacksburg, South Carolina.
NASDAQ: USAR
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While MP Materials is further ahead, growth-oriented investors may gravitate toward USA Rare Earth for one reason: its Round Top deposit. This deposit is rich in scarce, heavy, rare-earth elements, such as dysprosium and terbium, which are needed to make heat-resistant permanent magnets for electric vehicles, wind turbines, and military defense systems.
Both stocks come with risk, but one stands out as a better buy
Investing in MP Materials or USA Rare Earth isn't for the faint of heart. That's because both companies are still early-stage, pre-profit businesses investing heavily in building out mining and processing capabilities. For that reason, conservative investors would likely want to avoid both stocks right now.
That said, if you are intrigued by the rare-earth supply chain build-out in the U.S., MP Materials stands out as the better buy to me right now. The company already has the Mountain Pass mine and processing capabilities, has secured major supply contracts with Apple and General Motors, has a better deal with the government with established price floors, and is already benefiting from ramped-up production.
