Lithium Americas Corp. (NYSE:LAC) produces a component that might power electric vehicle (EV) batteries for the following decade or longer. Yet, the exciting way forward for EV battery technology isn’t on LAC stock traders’ minds today because the share price is taking a haircut.
If you’ve got a bullish long-term thesis in regards to the lithium price, it could be tempting to load up on Lithium Americas stock at a reduction. In any case, the present government is clearly friendly to lithium-mining activity, having approved a $2.26 billion conditional loan to Lithium Americas to develop a lithium mine in Nevada.
Then again, LAC stock is basically only trading at a fair-value discount if the corporate is in decent financial condition and has strong growth prospects. Today’s traders are voting “no” as they unexpectedly dump their Lithium Americas shares.
55 million reasons to sell LAC stock
Lithium Americas stock is trending within the financial news today, but not for anything positive. The share price was down 26% to 27% in midday trading, so there should be something amiss with Lithium Americas.
Actually, it might be a “excellent news, bad news” sort of situation, though LAC stock investors are mainly focused on the bad part. In a press release, Lithium Americas announced its proposal to supply and sell 55 million common stock shares in an underwritten public offering.
The excellent news is that Lithium Americas will, in fact, receive a capital infusion from the share sale. The aforementioned press release didn’t specify the anticipated proceeds from the general public offering. Nevertheless, Bloomberg reported Lithium Americas as stating that the corporate “raised $275 million after agreeing to sell shares for $5 apiece.”
Bloomberg described the share sale as a “deep discount,” and I’d say this was a good characterization on the time of the general public offering announcement. Pre-announcement, LAC stock traded at around $6.60 per share, so it’s indeed a “deep discount” to that price if Lithium Americas is selling them at $5 apiece.
Does this reek of desperation? That will be the query on stock traders’ minds today. The lithium price has declined for the reason that hype-fueled days when rates of interest were low and the demand for EVs seemed limitless.
Today, nonetheless, EV demand isn’t as robust as overeager investors once assumed it might be. Furthermore, the speculative fervor of 2021 has been, to a certain extent, snuffed out by the prospect of higher-for-longer rates of interest.
So, possibly Lithium Americas needs some extra money now regardless that the federal government already green-lit a $2.26 billion conditional loan. Simply to recap, it had roughly $196 million value of money and money equivalents at the top of last yr. Between the loan from the federal government and the proposed share sale, Lithium Americas could find yourself with a good capital position.
Keep watching the lithium price
Besides the perception of Lithium Americas’ desperation to boost capital, today’s stock traders were probably concerned in regards to the prospect of share-value dilution. Hence, even when Lithium Americas is selling shares at a “deep discount,” the stock isn’t necessarily a bargain.
Keep in mind that share sales could be akin to a slippery slope. Once an organization goes down the print-and-sell path, it could be easier to enact more share sales in the long run. Consequently, large-scale share sales can erode the trust of current shareholders.
From that perspective, share sales aren’t really “free money” for an organization by any means. Still, glass-half-full investors can decide to deal with what Lithium Americas might do with $275 million.
It’s not a giant mystery, really. Lithium Americas, in line with Reuters, expects its Nevada-based Thacker Pass lithium project to “run at full capability in 2028, aiming to eventually produce 80,000 metric tons per yr.” That’s quite ambitious and, naturally, would require substantial input costs in the following 4 years.
Subsequently, investors searching for a “deep discount” in LAC stock may have to dust off their crystal balls and look several years out. Even when Lithium Americas can get Thacker Pass running at full capability in 2028, it won’t mean much to investors if the lithium price is at all-time low.
So, keep your position size small and keep your eyes on the lithium price. Only time will tell whether EVs will rapidly gain traction amongst automotive buyers in the course of the next few years. In that case, Lithium Americas stock could fly – but then, if the corporate enacts more share sales, the stock could also crash and burn.
Disclaimer: All investments involve risk. On no account should this text be taken as investment advice or constitute responsibility for investment gains or losses. The data on this report mustn’t be relied upon for investment decisions. All investors must conduct their very own due diligence and seek the advice of their very own investment advisors in making trading decisions.