USA Rare Earth's CHIPS Deal Faces Scrutiny Amid High Execution Risks

What happened

USA Rare Earth announced a non-binding Letter of Intent for up to $1.6 billion in CHIPS Act funding plus a $1.5 billion private equity investment, positioning it as a key player in domestic rare earth supply chains. The deal involves significant dilution through equity and warrants issued to the U.S. government, while the company remains pre-revenue with explicit going-concern warnings in recent filings. Following the news, the stock price rose to $25.86, up 124% over the past year, reflecting market optimism about government-backed growth. However, the CHIPS package lacks binding offtake agreements or price floors, and its phased milestones through 2028 leave the company exposed to funding delays and operational setbacks. Despite political support mitigating some risks, the high valuation assumes flawless execution amidst ongoing losses and heavy capital requirements, overlooking the crowded sentiment and inherent uncertainties.

Implication

The immediate implication is that USAR's stock acts as a volatile policy-beta play, driven by sentiment rather than fundamentals, making it susceptible to sharp corrections if news flow disappoints. Over the next 6-12 months, key risks include the conversion of the CHIPS LOI into binding agreements and timely commissioning of the Stillwater magnet plant, both of which are non-guaranteed and critical to the thesis. Failure to secure definitive offtake contracts for NdFeB magnets could lead to underutilization and persistent losses, undermining the integrated business model and cash flow projections. The substantial dilution from the PIPE and government warrants may further pressure share prices if execution falters or market enthusiasm wanes, especially given the pre-revenue status and going-concern warnings. Long-term success hinges on integrating complex projects across the U.S. and Europe amid potential oversupply and policy shifts, requiring sustained capital access that remains contingent on milestone achievements.

Thesis delta

The Motley Fool article highlights political risk mitigation but does not alter the DeepValue report's core thesis: USAR is a high-risk, crowded trade with valuation pricing in near-perfect outcomes. Any meaningful shift would require concrete progress on CHIPS finalization, Stillwater commissioning, and anchor offtake agreements, all of which remain uncertain and closely monitored. Thus, the investment call remains a potential sell, with downside scenarios more probable than upside surprises given the execution hurdles and dilution overhang.