Shares of Australian — soon to be American — mining company Piedmont Lithium (NASDAQ:PLL) were trading down by as much as 23.5% on Wednesday morning after management announced plans to float 1.75 million new American Depositary Shares (ADS) at $70 apiece. As of 12:10 pm. EDT, they were off by 18.3%.
The offering is expected to raise at least $122.5 million in cash that will be used “to continue development of the Company’s Piedmont Lithium Project.” According to the company, each ADS represents 100 ordinary shares of common stock trading on the Australian market.
Piedmont’s offering includes an overallotment option that would permit its underwriters to buy up to 262,500 additional ADSes, raising the total amount of potential new ADSes to just over 2 million, and the total cash haul for the company to almost $140.1 million, before deduction of fees and costs.
So the bad news: This share offering promises to dilute existing shareholders out of about 9.6% of their ownership stake in the company.
The good news: It will provide the company with about $140 million in cash. At Piedmont’s current cash burn rate of just over $12 million per year (according to data from S&P Global Market Intelligence), that should be plenty to see it through its start-up cycle. That could ensure that, by the time July 2022 rolls around, Piedmont will be able to fulfill its commitment to supply more than 50,000 tons of spodumene concentrate (a mineral rich in lithium) per year to its marquee customer — Tesla (NASDAQ:TSLA).
Suffice it to say that, bad as the dilution may hurt today, it’s crucial that Piedmont get access to the cash it needs to begin production — or else its stock might not be worth anything at all. And when you consider that Piedmont’s share price has already risen by more than 1,600% in the past year, it makes more sense to get that cash by selling stock than by taking on debt.
Simply put, I think this sell-off is an overreaction.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.