Piedmont Lithium (NASDAQ:PLL) stock has leapt onto the scene. The company is based out of Australia. However, it recently listed its shares on the Nasdaq as well, and Piedmont Lithium stock shot up as much as 500% in recent weeks. This came as it disclosed a crucial agreement to supply lithium to Tesla (NASDAQ:TSLA).
However, shares are starting to cool back down. And now, Piedmont looks set to come under further pressure. The company recently announced that it will be issuing 1.5 million shares of stock.
While traders might rush to buy the subsequent dip, keep these points in mind before making any moves.
No Commercial Operations Yet
The first thing a prospective investor should realize is that Piedmont Lithium has no ongoing business as of yet. In fact, historically, Piedmont Lithium has never produced any revenues from lithium sales.
At this point, people are putting money into Piedmont Lithium in hopes that it will develop a lithium business in the future. To that end, Piedmont has a promising development site in North Carolina. North Carolina is a favorable jurisdiction for mineral operations from a tax perspective, and has seen other lithium mining ventures in the past.
However, none of that guarantees that Piedmont Lithium will have ultimately have similar success.
Project Economics Are Good, But Not Great
For Piedmont specifically, according to its latest pre-feasibility study for the key chemical plant, it intends to spend $377 million. All-in costs would be somewhat higher once you consider land acquisition and other necessary capital expenditures. The company anticipates the investment turning into $7.3 billion of revenues, $3.6 billion of EBITDA, and $2.4 billion of free cash flow.
Piedmont plans on recovering its initial invested funds in three-and-a-half years, and says that at an 8% discount rate, the project’s present value is $714 million.
These figures are all fine and well (though conservatively, mining projects often use a 10% discount rate instead of 8%). Even so, this isn’t compelling math given that Piedmont’s market capitalization is already nearly half a billion dollars. For all the risk of funding, building, and operating the plant, the net present value is only moderately higher than the current valuation.
On top of that, the market for lithium is much less developed than gold, silver, or other such mine products, and thus there is more uncertainty over what the economics will look like once this operation is actually in production.
Still Needs Heaps Of Funding
Up until Tesla came along, there was no sign that Piedmont Lithium would be able to raise the half billion or so dollars needed to build this project. With Tesla’s name attached to the project, however, I expect that they’ll have a much easier time funding the project.
Still, they’re likely to either offer high-yield bonds or a ton of stock to raise the needed capital. Piedmont’s current market capitalization is around $400 million. Needless to say, it’s hard to raise more capital than your current market cap via stock offerings without collapsing the price of your shares.
We’ll see how shares hold up the wake of this in-process share offering, but don’t be surprised if it puts quite an overhang on PLL’s stock price in coming weeks.
And the market for loans to lithium miners with no existing revenues is likely to be a demanding one. With Tesla on board, Piedmont Lithium will get investors’ attention. But it will still be a challenge to come up with funding for this massive project.
Will Tesla Follow Through?
Tesla is a wonderful partner as far as publicity goes. If you want a ton of free media attention, you can’t do any better than reaching a deal with Tesla. As the reaction in Piedmont Lithium stock recently has shown, Elon Musk brings a level of enthusiasm that you wouldn’t get signing a similar supply contract with, for example, Toyota (NYSE:TM).
However, Tesla and Elon Musk have a known history of missing deadlines. In fact, on a recent conference call, Musk stated, “Punctuality is not my strong suit, but I always come through in the end.”
Sometimes Tesla completes things ahead of schedule, such as the Shanghai Gigafactory. But on many occasions, there are delays before Tesla ends up making something happen.
With Piedmont Lithium, where you aren’t likely to have commercial production until at least 2023 anyway. And if Tesla’s priorities end up elsewhere in the interim, Piedmont could sag for an extended period until operations really get rolling.
Piedmont Lithium Stock Verdict
Traders have aggressively bid up Piedmont Lithium stock since Tesla announced its intentions to buy lithium. I get the excitement. However, the current share price is simply too much too quickly for the nature of this project.
Piedmont has a ton of work to do to get funding for and then build this project. And once it’s up and running, we’ll still have to see if the economics are actually robust or not. With production still years away, there’s plenty of time to wait for dips before taking a position.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.