Lithium is an elemental metal that has experienced strong demand in recent years, as it is widely used to manufacture batteries for electric vehicles (EVs). The global shift towards clean energy solutions has accelerated, as countries aim to fight climate change, acting as a tailwind for lithium prices.
However, in 2023, rising interest rates and elevated inflation rates have resulted in slowing demand for EVs globally. Several legacy EV manufacturers, including Ford and General Motors, are scaling back on the production of battery-powered vehicles due to a sluggish macro environment.
These factors have resulted in an oversupply of lithium, dragging prices of the commodity significantly lower in recent months. Expectedly, shares of lithium mining companies are also trailing the broader markets in 2023.
For instance, shares of Lithium Americas (TSX: LAC) are down roughly 61% from all-time highs, valuing the company at $1.4 billion by market cap. Here’s why I think LAC stock might move lower in the near term.
An overview of Lithium Americas
Lithium Americas has extraction sites in Argentina in partnership with Ganfeng Lithium. It has also completed a feasibility study in a site located in Nevada and has begun construction to extract the metal from this location.
Lithium Americas might soon begin delivering on its promises due to a portfolio of high-potential projects in the Thacker Pass, a region with an estimated value of $5 billion in total reserves. The projects at Thacker Pass are forecast to yield 80,000 tons each year, making it a key driver for Lithium Americas in the upcoming decade.
As Lithium Americas has yet to deliver any revenue, it is a highly speculative stock. Moreover, investing in basic materials and metals, including lithium, is quite risky. Typically, commodity prices soar when demand is steady or accelerating, allowing mining stocks to deliver outsized profits.
Alternatively, if supply outpaces demand, commodity prices fall, dragging share prices of mining companies lower.
In addition to cyclicality, mining companies are capital intensive, and a majority of players utilize debt to fuel their expansion plans, allowing them to benefit from economies of scale. In the last 20 months, rising interest rates have increased the cost of debt significantly for companies across sectors, resulting in an erosion of profit margins.
Lithium Americas ended the third quarter with $261 million in cash and $47.3 million in debt, providing enough room to support its cash burn rate for the next year. Bay Street forecasts Lithium Americas to report adjusted losses of $0.31 per share in 2023 and $0.27 per share in 2024.
What is the target price for Lithium Americas stock?
Running a mining operation is a costly process. It takes several years to ramp up mining capacities, which results in a significant drain of company resources. Further, Chile, which is the second-largest lithium producer globally, recently disclosed plans to nationalize the lithium mining industry with a state-owned entity. This move could derail the financials of mining companies with operations in Chile and limit expansion plans for Lithium Americas and its peers.
However, despite the oversupply, long-term demand for lithium is expected to remain strong due to the widespread adoption of EVs in the next two decades. While I remain bearish on LAC stock in the next year, analysts expect shares to almost double from current levels.
