Key Points
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USA Rare Earth has potential to deliver significant upside.
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The capital intensity of mining and competition from other rare-earth miners make it unlikely that USA Rare Earth will grow into a $380 billion company.
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I’ll get straight to the point: Investing $10,000 in USA Rare Earth (NASDAQ: USAR) could be a worthy endeavor for long-term wealth building, but it likely won’t make you a millionaire on its own.
For starters, USA Rare Earth is a rare-earth mining company. Its assets include the Round Top deposit in Texas, one of the few major U.S. deposit containing rare earths like dysprosium and terbium, both of which are essential for manufacturing permanent magnets. It also plans to manufacture magnets from its facility in Oklahoma, while also producing rare earths from a mine in Brazil.
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Obviously, with the U.S. in need of a domestic rare-earth supply chain, there’s plenty to like about USA Rare Earth. But turning $10,000 into $1 million requires a 100-fold return. USA Rare Earth’s market cap is already around $3.8 billion. A 100-fold gain would imply a $380 billion valuation, assuming no major share dilution.
Staggering, yes. But likely to happen? Not very.
The thing is, even if USA Rare Earth succeeds in its mine-to-magnet endeavors, earning the revenue needed to support a $380 billion valuation will be an enormous challenge. I won’t say impossible, but there’s unlikely to be enough demand to support a mining company of that size, especially with MP Materials (NYSE: MP) also working toward the same goal.
Even the world’s largest mining companies today are nowhere near $380 billion.
Data by YCharts
Still, just because USA Rare Earth is unlikely to deliver a 100-fold gain doesn’t mean it’s a bad investment. Over time, this mining stock could reward investors handsomely, especially if its mine-to-magnet business takes off. I wouldn’t buy USA Rare Earth expecting to become a millionaire but I might consider adding some shares to a diversified portfolio for potential long-term upside.
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Steven Porrello has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends MP Materials. The Motley Fool has a disclosure policy.
