(Bloomberg) — It’s almost old hat to the market by now. Take a struggling company, cut a deal with the US government, sealed with the approval of President Donald Trump, sit back and watch the stock take off.
But after shares of Lithium Americas Corp. soared 188% in just two weeks, analysts are starting to challenge the stock’s vaunted valuation and the deal’s less than favorable terms for stockholders in the Canadian mining company.
Most Read from Bloomberg
“Simply put, we failed to appreciate how a heated bull market would interpret Trump’s magic touch, on a thematic commodity starving for attention,” Ben Isaacson, an analyst at Scotiabank, wrote in a note downgrading his recommendation to sector underperform from sector perform on Monday. “Of course, this is despite the magic touch being dilutive to shareholders.”
He recommended investors take profits now, and “reload at lower levels.”
He’s one of four analysts that have downgraded their ratings since the agreement was announced. It’s a sign of the times — as US stocks climb to new heights while gauges tracking market mania flash a warning — that so far the market has largely ignored their calls. The stock reached a two-year in recent days and trades more than 40% above its average analyst price target.
Under the terms of the deal the US is taking a 5% equity stake in the Vancouver-based company and a 5% stake in its Thacker Pass mining project located in Nevada. The company is drawing $435 million from a loan given by the Department of Energy and $182 million of debt servicing will be delayed over the first five years.
It’s one of a handful of deals the current administration has hammered out since July, when the US Department of Defense made a $400 million equity investment in MP Materials Corp. Shares of the rare earth magnet producer are up more than 390% so far this year. Intel Corp. is up more than 50% since mid-August when details of the government’s nearly 10% stake in the beleaguered chipmaker started to surface. Late Monday, the White House announced a stake in another miner, Trilogy Metals Inc.
According to calculations from analysts at Jefferies, if each additional Lithium Americas loan drawdown requires similar concessions, that could dilute equity for existing shareholders by some 40% over the next several years.
“There’s other opportunities. If you’re an investor and you’ve seen this triple in a couple months, you take your profits,” said MacMurray Whale, an analyst at Cormark Securities. The analyst downgraded Lithium Americas to market perform from buy following the agreement. “I would rather tell people to wait to see whether there is a pullback after this excitement.”
