Most investors know that most stocks will only generate average returns. However, every now and then a prospect emerges that seems like a potential turning point. In fact, it can 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 is the conundrum that anyone considering US Rare Earths (NASDAQ: USAR) right now you are facing. The world needs what it has. However, the math may or may not make enough risk-adjusted sense in the long run.
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Just as the name suggests, USA Rare Earth is in the business of rare earth minerals. Once its facility in Stillwater, Oklahoma, begins operations sometime in the first half of this year, the pre-revenue company will be able to manufacture 5,000 tons of rare earth magnets annually, putting it in a business that U.S. Rare Earths President Thayer Smith says is poised to triple in size within 10 years.
However, it is not just a manufacturing facility. In fact, the company’s most prized asset is its property in West Texas, called Round Top, which is still being prepared for mining. While any such estimate should be taken with a grain of salt (as no one knows for sure until the ground is actually dug), some have suggested that there are tens of millions of tonnes of rare earth elements waiting to be mined at the site, plus enough lithium hydroxide (used in electric vehicle batteries) to produce 20,000 tonnes every day for more than 100 years.
Another miner, Texas Mineral Resources, has previously suggested that the resource could generate in the order of $400 million a year (in 2019 prices), which would translate into more than $8 billion in revenue over the mine’s expected 20-year life. Not bad.
The enigma? It will take at least a couple more years and a few hundred million dollars just to start production at Round Top. Additionally, while it’s encouraging to know that USA Rare Earth has access to liquidity when it needs it, the fact that it has raised up to $1.3 billion in loan-based financing from the federal government plus another $1.5 billion in eventually dilutive private financing says a lot about the kind of costs that have been and will be involved here.
