Shares in lithium producer Albemarle (ALB 1.65%) were down by 14.1% in the week to Friday morning. The move comes in a week when Albemarle announced an offering of $1.75 billion in depositary shares on Monday and then increased the offering to $2 billion on Wednesday.
The issuance puts the stock price under pressure as investors start pricing in a dilution of equity in the future when the shares are converted into common stock.
Why Albemarle made the offering
According to the press release, Albemarle intends to use the proceeds for "general corporate purposes," including "construction and expansion of lithium operations in Australia and China that are significantly progressed or near completion" and repaying "outstanding commercial paper."
According to KeyBanc Capital Markets, the move helped ensure Albemarle would avoid a credit rating downgrade.
That's an understandable argument, as Albemarle's near-term earnings and cash flow will come under pressure this year due to the slump in the price of lithium carbonate (which is down 70% year over year).
Image source: Getty Images.
What it means to investors
The move highlights the essence of the investment case for investors. Suppose you believe that the slump in the price of lithium is temporary and its long-term trajectory is upward, driven by burgeoning electric vehicle battery demand. In that case, the offering makes perfect sense. It shores up Albemarle's balance sheet and enables it to invest for growth or potentially make acquisitions.
That's well and good, but with Albemarle and rivals like SQM continuing to aggressively push ahead with expansion projects, there could be more pressure on the price of lithium ahead.
