Elemental Exodus: Share Offering Prompts Lithium Americas Stock Sell-off

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Lithium Americas Corp. (NYSE:LAC) produces an element that could power electric vehicle (EV) batteries for the next decade or longer. Yet, the exciting future of EV battery technology isn’t on LAC stock traders’ minds today as the share price is taking a haircut.

If you have a bullish long-term thesis about the lithium price, it may be tempting to load up on Lithium Americas stock at a discount. After all, the current 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.

On the other hand, LAC stock is really only trading at a fair-value discount if the company is in decent financial condition and has strong growth prospects. Today’s traders are voting “no” as they hastily dump their Lithium Americas shares.

55 million reasons to sell LAC stock

Lithium Americas stock is trending in the financial news today, but not for anything positive. The share price was down 26% to 27% in midday trading, so there must be something amiss with Lithium Americas.

Actually, it could be a “good news, bad news” type of situation, though LAC stock investors are mainly focused on the bad part. In a press release, Lithium Americas announced its proposal to offer and sell 55 million common stock shares in an underwritten public offering.

The good news is that Lithium Americas will, of course, receive a capital infusion from the share sale. The aforementioned press release didn’t specify the anticipated proceeds from the public offering. However, Bloomberg reported Lithium Americas as stating that the company “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 fair characterization at the time of the public offering announcement. Pre-announcement, LAC stock traded at around $6.60 per share, so it is indeed a “deep discount” to that price if Lithium Americas is selling them at $5 apiece.

Does this reek of desperation? That may be the question on stock traders’ minds today. The lithium price has declined since the hype-fueled days when interest rates were low and the demand for EVs seemed limitless.

Today, however, EV demand isn’t as robust as overeager investors once assumed it would be. Moreover, the speculative fervor of 2021 has been, to a certain extent, snuffed out by the prospect of higher-for-longer interest rates.

So, maybe Lithium Americas needs some extra cash now even though the government already green-lit a $2.26 billion conditional loan. Just to recap, it had approximately $196 million worth of cash and cash equivalents at the end of last year. Between the loan from the government and the proposed share sale, Lithium Americas could end up with a decent capital position.

Keep watching the lithium price

Besides the perception of Lithium Americas’ desperation to raise capital, today’s stock traders were probably concerned about the prospect of share-value dilution. Hence, even if Lithium Americas is selling shares at a “deep discount,” the stock isn’t necessarily a bargain.

Bear in mind that share sales can be akin to a slippery slope. Once a company goes down the print-and-sell path, it may be easier to enact more share sales in the future. Consequently, large-scale share sales can erode the trust of current shareholders.

From that perspective, share sales aren’t really “free money” for a company by any means. Still, glass-half-full investors can choose to focus on what Lithium Americas might do with $275 million.

It’s not a big mystery, really. Lithium Americas, according to Reuters, expects its Nevada-based Thacker Pass lithium project to “run at full capacity in 2028, aiming to eventually produce 80,000 metric tons per year.” That’s quite ambitious and, naturally, will require substantial input costs in the next four years.

Therefore, investors looking for a “deep discount” in LAC stock will have to dust off their crystal balls and look several years out. Even if Lithium Americas can get Thacker Pass running at full capacity in 2028, it won’t mean much to investors if the lithium price is at rock bottom.

So, keep your position size small and keep your eyes on the lithium price. Only time will tell whether EVs will rapidly gain traction among automotive buyers during the next few years. If so, Lithium Americas stock could fly – but then, if the company enacts more share sales, the stock could also crash and burn.

Disclaimer: All investments involve risk. In no way should this article be taken as investment advice or constitute responsibility for investment gains or losses. The information in this report should not be relied upon for investment decisions. All investors must conduct their own due diligence and consult their own investment advisors in making trading decisions.