Key Points
- Lithium Americas’ stock has soared 175% in two weeks after a deal with the U.S. government.
- The deal, which has the backing of President Trump, is to fund a major lithium mine in Nevada.
- Despite the huge rally, four analysts have now downgraded the stock. They warn that the terms of the deal are “dilutive” and will harm existing shareholders.
- The stock’s continued high price shows the power of the “Trump trade” in the current market.
It’s become a familiar pattern in today’s market: a struggling company cuts a deal with the U.S. government, gets President Trump’s blessing, and its stock skyrockets. But in the case of Lithium Americas, some analysts are now saying the rally has gone too far, too fast.
Shares of the Canadian mining company have soared an incredible 175% in less than two weeks after it announced a deal with the U.S. government to secure funding for its Thacker Pass lithium mine in Nevada. However, analysts are now pointing out that the terms of the deal are not as great for shareholders as the market seems to think.
“Simply put, we failed to appreciate how a heated bull market would interpret Trump’s magic touch,” wrote one Scotiabank analyst as he downgraded the stock. He noted that the “magic touch” is actually “dilutive to shareholders,” meaning it will reduce the value of their existing shares. He’s now recommending that investors take their profits and “reload at lower levels.”
He’s not alone. Four different analysts have downgraded their ratings on the stock since the deal was announced. The problem, they say, is that to get the government funding, the company is giving up equity stakes and making concessions that could dilute shareholder value by as much as 40% over the next few years.
Despite these warnings, the stock is still trading near a two-year high, a sign of just how powerful the “Trump trade” has become. “The market’s gone from overly pessimistic on the stock to now overly optimistic,” said a Morningstar analyst.
