However, the stock has since regained those gains. Mostly, due to some renewed bearishness around the near-term outlook for the lithium market.
Still, while perhaps a disappointing turn of events, for investors who bought LAC on subsidiary news, a dip into the mid-20s could offer a great entry point for new investors.
As I’ve discussed in my coverage of LAC and other lithium stocks, concerns about a “lithium crash” may be exaggerated.
Combined with the positive impact of a continued “lithium boom,” this planned subsidiary could enhance the overall future performance of this stock.
|Latin America and the Caribbean||Americas Lithium||$26.40|
LAC stock and recent Spinoff news
On November 3, LAC revealed its intention to spin off its lithium mining interests in North America, including the Thacker Pass project (located in Nevada), as a separate publicly traded company, which will take the name Lithium Americas.
Following this tax-exempt offering (scheduled for completion in late 2023), the existing entity will be renamed Lithium International.
Lithium International will own Argentine mining interests, including its 44.8% stake in the Caucharí-Olaroz lithium carbonate project.
It may seem strange for a pre-revenue company now to decide to spin off into two separate entities, but this is a promising development for equity investors in LAC.
Splitting into two companies could unlock value, accelerating the LAC’s “bonuses timeline.” As Caucharí-Olaroz nears production, the company as a whole is on the brink of profitability.
Sell-side estimates point to earnings of about 68 cents per share next year.
However, without early-stage projects such as Thacker Pass affecting results, the standalone Lithium International could report a greater amount of earnings.
The value of the reclassified International Lithium, combined with the value of the “new” LAC, could significantly exceed the current share price of the combined company.
“Lithium statue?” Not so fast!
While this divestiture plan seems like a win-win for investors, it makes sense why LAC shares fell after the huge rally on the subsidiary news. Even with spot lithium prices at record highs, many still worry that a “lithium crash” is looming.
The argument is that between China’s economic slowdown (which is hurting demand), and an oversupply of lithium, prices will fall sharply from current high levels. However, I again think that these “bust” fears are exaggerated.
Despite the “Chinese slowdown,” and the planned phasing out of Chinese subsidies for electric vehicles, it’s unclear whether significant cuts in electric vehicle battery production in China are about to happen.
As the rest of the world ramps up production of electric vehicles, bears may overestimate the degree to which Chinese demand for lithium has lowered prices. As for concerns about oversupply, this also appears to be an overreaction.
Global lithium production may need to increase many times over current levels, just to meet projected demand in the coming years. The increase in the capacity to produce lithium is far from immediate. It takes years to create new mines on the Internet. Simply put, don’t expect the “lithium bust” to screw up the Americas lithium, before and after class.
The bottom line is on LAC stock
And given how spin-offs can unlock value/move the “reward timeline” forward, now that’s a more promising opportunity.
However, do not assume that LAC is becoming less dangerous. In large part, because the “unlocking value” thesis is built on the assumption that things will go as planned with Thacker Pass.
A battle to revoke approval of this controversial mining project is yet to be resolved. Also, without Caucharí–Olaroz’s expected cash flow stabilization, the “new” Lithium Americas will likely need outside financing to bring Thacker Pass into production, putting off investors.
In other words, even if Lithium International zooms in after the spin-off, the entity holding the North American assets could underperform, hampering overall returns.
However, as the pop-up increases its upside potential, feel free to consider LAC shares worthy of a small speculative position.
LAC stock has a B rating portfolio scores.
At the date of publication, neither Louis Navillier nor the InvestorPlace Research Officer primarily responsible for this article (directly or indirectly) held any positions in the securities mentioned in this article.