Ramaco Stock Tumbles. Why Shares of the Rare-Earths Company Are Sliding.

A view of the Rocky Mountains outside Dubois, Wyoming. Ramaco Resource is developing the Brook rare earth Mine in Sheridan, Wyoming. (AFP via Getty Images)

Key Points

• Ramaco Resources shares fell 8.5% after announcing a $300 million convertible debt sale to fund rare-earth and critical- minerals projects.
• The convertible debt offering includes a “capped call” transaction designed to limit future dilution for existing shareholders.
• Rare-earth stocks took off when China threatened export controls, but much of the gains have dissipated.

Investors are looking for a bottom in rare-earths stocks. Ramaco Resources won’t help them find one.

Ramaco stock dropped 8.5% to $24.34 on Wednesday, while the S&P 500 and Dow Jones Industrial Average rose 0.4% and 0.5%, respectively.

Ramaco, which has a metallurgical coal business, is developing the rare-earths Brook Mine in Sheridan, Wyo. The Wednesday move in the stock came after the company announced the sale of $300 million in convertible debt.

Most of the money will be used “to fund the development of its rare earth elements and critical minerals project, for strategic growth opportunities, and for general corporate purposes,” according to a news release.

Convertible debt can mean more shares outstanding in the future, diluting existing shareholders’ stakes, which is one reason shares can trade lower around offerings.

This offering, however, includes a “capped call” transaction to limit dilution. Essentially, Ramaco will use a portion of the money to buy call options on its stock, making money if the price rises above the strike price embedded in the option. Then, if the convertible bonds convert into equity, Ramaco can use proceeds from the capped call to offset dilution.

It isn’t all that unusual for a company issuing convertible debt to add this type of feature.

Ramaco’s stock weakness doesn’t seem to be affecting others. MP Materials , the largest rare-earths miner in the Western Hemisphere, rose 0.1%, USA Rare Earth shares added 3.2%.

The gains for those two were a relief. Coming into Wednesday trading, shares of the three were down an average of 33% from the heights they reached in early October, after China threatened rare-earths export restrictions as it sought leverage in its trade spat with the U.S.

China dominates rare-earths production with an estimated 85% of global processing capacity. China’s near-monopoly position and repeated threats of export controls are why the U.S. government has moved to break the Chinese monopoly, signing deals with MP and others for rare-earths supply and development.

The U.S. government’s focus on rare earths is the big reason why, despite recent drops, the three shares were still up an average of 161% so far this year, coming into Wednesday trading.

Write to Al Root at allen.root@dowjones.com