Stock offering causes Lithium America stock selloff

Lithium Americas Corp. (NYSE:LAC) produces elements that could power electric vehicle (EV) batteries for the next decade or more. But with the stock currently falling, the exciting future of EV battery technology is not on the minds of LAC stock traders.

If you have an optimistic long-term outlook for lithium prices, you may be tempted to buy Lithium Americas stock at a discount. After all, the current government is clearly friendly to lithium mining activities. Approved a $2.26 billion conditional loan to Lithium Americas to develop a lithium mine in Nevada.

LAC stock, on the other hand, trades at a discount to fair value only when the company’s financials are strong and its growth prospects are strong. Today’s traders are voting “no” as they rush to sell Lithium Americas stock.

55 Million Reasons to Sell LAC Stock

Lithium Americas stock is trending in financial news today, but it’s not all positive. There must be something wrong with Lithium Americas, as the stock is down 26-27% in midday trading.

LAC stock investors often focus on the bad, but this may actually be a “good news, bad news” type of situation. In a press release, Lithium Americas announced its proposed offering and sale of 55 million shares of its common stock through an underwritten public offering.

The good news is that Lithium Americas will receive an influx of capital, of course, through stock sales. The aforementioned press release did not specify the expected proceeds from the offering. However, Bloomberg reports that Lithium Americas “raised $275 million after agreeing to sell stock at $5 per share.”

Bloomberg described the stock sale as a “big discount,” and I’d say that was a fair characterization at the time the offering was announced. Before the announcement, LAC stock was trading around $6.60 per share, so if Lithium Americas sells for $5 per share, that’s actually a “big discount” to that price.

Does it smell like desperation? That may be the question on the minds of stock traders today. Lithium prices have fallen since the hype era when interest rates were low and demand for EVs seemed limitless.

But today, EV demand isn’t as strong as enthusiastic investors once expected. Moreover, the speculative enthusiasm for 2021 has been somewhat muted by the prospect of rising long-term interest rates.

So Lithium Americas may need additional cash, even though the government has already approved $2.26 billion in conditional loans. To summarize, it had cash and cash equivalents worth approximately $196 million at the end of last year. Between the government loan and the proposed stock sale, Lithium Americas could end up with an adequate capital position.

Keep an eye on lithium prices

In addition to the perception of Lithium Americas’ desperation to raise capital, today’s stock traders were probably also concerned about the potential for share price dilution. So even if Lithium Americas sells its stock at a “big discount,” that stock isn’t necessarily cheap.

Keep in mind that selling stocks can be like a slippery slope. If a company goes down the print-and-sell route, it may be easier to execute more stock sales in the future. As a result, a large share sale could undermine the confidence of current shareholders.

From that perspective, stock sales aren’t really “free money” for a company in any sense of the word. Still, half-baked investors can focus on what Lithium Americas can do with $275 million.

It’s not really a big mystery. According to Reuters, Lithium Americas expects its Nevada-based Thacker Pass lithium project to “be operational at full capacity in 2028, producing 80,000 metric tons per year.” This is a very ambitious undertaking and will naturally require significant input costs over the next four years.

So investors looking for a “big discount” on LAC stock will have to dust off their crystal balls and look a few years ahead. Even if Lithium Americas can operate Thacker Pass at full capacity in 2028, it won’t mean much to investors if lithium prices remain at record lows.

So keep your position sizes small and keep an eye on lithium prices. Only time will tell whether EVs will quickly gain traction among car buyers in the coming years. If so, Lithium Americas stock could skyrocket. However, if the company conducts more stock sales, the stock may also crash and be wiped out.

disclaimer: All investments involve risk. Under no circumstances should this article be taken as investment advice or constitute liability for investment profits or losses. The information in this report should not be relied upon for investment decisions. All investors should conduct their own due diligence and consult their own investment advisors when making trading decisions.