Rare-Earths Stock Plunges On Capital Raise. Why the Selling Pressure Won’t Let Up.

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 10% 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, including MP Materials and USA Rare Earth, have seen an average 33% decline since early October due to China’s export restriction threats.

Investors are looking for a bottom in rare-earths stocks. One probably won’t come on Wednesday.

In early trading, shares of rare-earths miner Ramaco Resources were down 14.4% at $22.77. The S&P 500 and Dow Jones Industrial Average were down 0.1% and up 0.1%, respectively.

Ramaco, which has a metallurgical coal business, is developing the rare-earths Brook Mine in Sheridan, Wyoming. The Wednesday move in its shares 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 could be impacting others. MP Materials , the largest rare-earths miner in the Western Hemisphere, was off 0.6% at $54.60. But USA Rare Earth was up 0.5% at $16.42.

Coming into Wednesday trading, shares of the three were down an average of 33% since early October, after China threatened rare-earths export restrictions amid 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