Now might be a prudent time to consider selling these lithium mining stocks. The rapid expansion of lithium production, particularly in China, has resulted in a global oversupply. It should be noted that China is one of the key markets for lithium production, as the world’s surplus has been accelerated by lower-than-anticipated growth in the electric vehicle (EV) and energy storage sectors.
Due to the cyclical amount of oversupply and a converse downtrend in battery and EV markets, we could be near the bottom of a cycle for the lithium market in general. Some of these firms have poor balance sheets, troubling valuations, and a worsening outlook.
With many great lithium mining stocks to buy out there, it makes little sense to hang on to those who are experiencing problems. So here are three companies that investors should steer clear of.
Ioneer (IONR)
Ioneer (NASDAQ:IONR) has a number of issues with it as one of those lithium mining stocks that investors should consider selling. The company’s quarterly cash burn rate ($8.3 million) suggests they have about 4.3 quarters of funding left at current spending levels. The recent $25.1 million raise may not be sufficient to reach production. Furthermore, The project is still in the permitting and engineering phase, with construction not yet started.
The company recently completed a $25.1 million equity placement. My biggest fear is that shareholders will become increasingly diluted as IONR must raise cash in order for its other long-term financing strategies to take place. It may also significantly take on debt, which reduces its upside from a risk-adjusted basis. Since it has already issued equity in order to stay afloat, my view is that investors will continually become diluted.
It has plans such as a potential $700 million loan from the U.S. Department of Energy’s Loan Programs Office, but this is subject to final approval, and it’s unclear when or if this will come through to the company’s balance sheet.
Sigma Lithium (SGML)
Sigma Lithium Corporation (NASDAQ:SGML) is a commercial producer of lithium concentrate with operations in Brazil. Net loss for the last quarter was $9.3 million, compared to $29.8 million in Q1 2023. However, the biggest issue with SGML in my view is due to its extensive use of leverage. The company has significant debt, with total loans and export prepayments of $272.6 million. At the time of writing, SGML has a net cash position of -$95.47 million or -$0.86 per share. Shares outstanding have also risen over the past twelve months, gaining 8.23%. Both of these factors increase the risks of investing in SGML and also decrease its value on a risk-adjusted basis.
Analysts have very optimistic targets for the company. Notably, its EPS and revenue are expected to rise 250.76% and 98.17%, respectively. These are huge numbers, that while attractive, may also be setting the company up to fail if it’s unable to meet these lofty expectations.
Ganfeng Lithium Co (GNENF)
Ganfeng Lithium Co (OTCMKTS:GNENF), a Chinese company, is one of the largest lithium producers in the world. As a penny stock, I think that GNENF is expensive in my view, with a P/E ratio of 13x. The company’s value has cratered 64.83% over the past year due to declining lithium pricing as well as weakness in the Chinese economy that has caused alarm for market observers.
While lithium might be at or near the bottom of its cycle with weaker demand for EVs, I still think that GNENF might be priced at a premium and that it is a falling knife. Indeed, its stock price over the past year resembles a falling knife, and its gains over the past five years have been reduced to the low double digits.
GNENF’s geopolitical position should also be considered, with many U.S. companies opting to source lithium directly from companies in the U.S.
On the date of publication, Matthew Farley did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.