Easy come, easy go. After soaring 13% Monday on the back of an optimistic note from analysts at National Bank Financial, shares of lithium mining stock Lithium Americas Corp (NYSE:LAC) came crashing back down to Earth on Wednesday, falling 8.6% through 3 p.m. ET.
The reason: Lithium Americas needs cash -- a lot of it. And it's going to the debt markets to obtain it.
In an after-hours announcement yesterday, Lithium Americas said it will be offering at least $225 million -- and potentially as much as $258.75 million -- worth of "convertible senior notes due 2027" paying a yet-to-be-determined interest rate.
Lithium Americas intends to use the proceeds from this debt issuance "to repay its indebtedness" to multiple parties and also "for general corporate purposes."
Lithium Americas currently carries about $182 million in debt on its books, so the debt issuance announced yesterday will in large part constitute just a rolling over of old debt in exchange for new, presumably lower-interest debt -- good news, in other words. Still, there are several reasons why investors may be upset by the news.
First, debt issuance of any sort is often considered a negative, and perhaps more so in the case of a company like Lithium Americas, which has never earned a profit and -- considering the amount of cash it is raising -- doesn't seem to expect to generateprofit on its own anytime soon.
Second, the fact that Lithium Americas' stock has more than tripled in value over the past year suggests the company may have been better off selling shares to raise any new cash it needs rather than taking on new debt.
Finally, there's the fact that Lithium Americas already has $482 million in cash on its books. If the company is raising even more cash now, there's the possibility that management is piling up cash with the intention of spending it on another big acquisition. Considering how overheated the market for lithium stocks has been of late (see Lithium Americas' recently announced deal to spend $400 million acquiring another unprofitable lithium miner, Millennial Lithium Corp), this creates the potential that Lithium Americas might overpay for such an acquisition.