USA Rare Earth Falls After Deal Approval. What’s Next for the Trade.

Coming into Wednesday trading, USA Rare Earth stock was up 55% this year. (JUSTIN HAMEL/AFP via Getty Images)

Key Points

• USA Rare Earth stock fell 4.8% to $16.92 on Wednesday despite UK approval for its acquisition of Less Common Metals.
• USA Rare Earth is acquiring Less Common Metals for $100 million and 6.74 million shares to upgrade mined material.
• The stock was up 55% this year before Wednesday, driven by a focus on building a Western rare-earth supply chain.

USA Rare Earth stock fell on Wednesday despite the company announcing U.K. approval for its purchase of the manufacturer Less Common Metals.

USA Rare Earth stock traded as high as $18.56 but closed at $16.92, down 4.8%, while the S&P 500 and Dow Jones Industrial Average gained 0.1% and 0.7%, respectively.

The company, which is developing a rare-earth mine in Texas, agreed to buy Less Common Metals, a U.K.-based manufacturer of specialized rare-earth metals and alloys, for $100 million and 6.74 million shares in September. The purchase is part of USA Rare Earth’s strategy to upgrade mined material into finished products.

USA Rare Earth shares jumped almost 10% when the deal was announced, before closing the day at $17.54, up 1.2%. Trading volatility is nothing new for rare-earth investors these days.

Shares reached as high as $43.98 in mid-October amid rising trade tensions between the U.S. and China, with the latter threatening export restrictions on rare-earth materials, which end up in everything from iPhones to fighter jets. Shares closed at $17.77 on Tuesday, essentially giving back all their recent gains after the U.S. and China negotiated a trade framework that included rare-earth exports.

China dominates rare-earth production, accounting for an estimated 85% of global processing capacity, a figure the U.S. aims to change, despite recent trade talks.

A renewed focus on building a Western rare-earth supply chain is the main reason USA Rare Earth stock was up 55% this year, entering Wednesday trading. Shares of MP Materials , the largest rare-earth miner in the Western Hemisphere, were up almost 300%.

In July, the Defense Department signed a blockbuster deal with MP that included an equity stake, a price floor for rare-earth materials, and a guaranteed customer for the rare-earth magnets MP is preparing to produce.

MP stock fell 3.6% on Wednesday to $59.72. Shares traded north of $100 in October. Shares of aspiring rare-earth miner Ramaco Resources gained 1.8%, closing at $24.34. Ramaco shares were as high as $57.80 in October.

Despite recent volatility, the outlook for the domestic rare-earth sector is bright. “We expect the US Government’s implementation of public-private partnerships will continue to ensure domestic supply chain resilience for key strategic products,” wrote Wells Fargo equity strategist Ohsung Kwon on Wednesday.

MP and other rare-earth miners will have a lot of business in the future. Right now, investors seem to be struggling to value that opportunity.

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