A combination of high interest rates and a low share price makes it vital that Lithium Americas (NewCo) bags a lucrative government loan, which could exceed $1 billion, to help fund a costly lithium project, analysts told S&P Global Commodity Insights.

The junior miner, which has headquarters in Vancouver, British Columbia, is embarking on the Lithium Nevada project, commonly known as Thacker Pass. It is one of the most expensive lithium projects in the world, with a budget of $2.27 billion for the first phase.

Lithium Americas has signed an offtake and investment agreement with General Motors Co. for $650 million, but with costs for Thacker Pass so high, the company needs additional funding. Signing up for more debt with banks in a high interest rate environment would be expensive. And with the original company, Lithium Americas (Argentina) Corp., splitting its Argentine and US assets into two companies, the miner does not want to risk overly reducing the value of existing investors' shares, analysts said.

The US Energy Department is in talks with Lithium Americas about the loan; in February, the company said it could be for up to 75% of Thacker Pass' capital costs for construction. Recent media reports suggest the loan could surpass $1 billion.

"There's a big question mark as to whether they will get the loan and how big that loan will be. If they get a smaller loan, they'll have to raise additional equity in order to be fully funded," Howard Klein, founder and partner of capital markets advisory firm RK Equity, told Commodity Insights. "There's real equity dilution risk."

Feeding the beast

The company has fewer funding options now that it has already signed away its phase one production to GM. That phase of production is expected to start in 2026 and go through the end of the decade. If the loan is not approved, or is approved for less than what Lithium Americas desires, equity or private debt are the company's remaining options.

The effective federal fund rate was at 5.33% as of Oct. 4, far higher than the .08% rate seen in 2021 and early 2022, according to the New York Fed. Lithium Americas can expect to pay well above the funds rate in interest, making a large loan expensive if the company goes that route.

Equity markets have their own complications. The company split on Oct. 3, creating an Argentine company that will manage its producing Cauchari-Olaroz project, which is already ramping up to full capacity, and US-based Lithium Americas (NewCo), which will manage the development of Thacker Pass.

The split also cut off the US company's ties to Chinese lithium powerhouse Ganfeng Lithium Group Co. Ltd., which holds a 9.37% share in the Argentine unit.

"As Lithium Americas has no, or minimal, cash flow currently, they need to rely on the capital markets for growth capital," Chris Berry, founder and president of advisory service House Mountain Partners. "Given that Lithium America's share price is near a 52-week low, raising cash by issuing shares is not a great idea as it's highly dilutive to existing investors and management who own shares."

Lithium Americas (NewCo) closed at $11.49 on Oct. 6, down from $16.19 before the companies separated.

RK Equity's Klein warned that the company's share value is already being diluted by GM's share purchases as part of its investment agreement.

GM purchased $320 million in shares of Lithium Americas at a price of $21.34 per share in February as its first tranche of funding to the company. Now that the company has successfully split, GM subscribed to purchase another $330 million in shares at market price as its second tranche funding on Oct. 3.

GM is now Lithium Americas' largest company shareholder with a 9.4% stake.

"They are looking at the markets, and the lithium market in particular, and trying to find the 'cheapest' mixture of debt and equity which allows the company to maximize its value and minimize its cost of capital," Berry said.

Ambitions for US lithium

The Thacker Pass project proposes turning lithium-dense clays in one of Nevada's rural northern regions into 40,000 metric tons of battery-grade lithium carbonate per year. Despite clay processing never being attempted at scale, the company is on pace to become the world's sixth-largest lithium producer and the US' largest lithium producer by 2026.

"It's the most ambitious project, I think, ever undertaken in the lithium industry," RK Equity's Klein said.

Processing and its related infrastructure is expected to total more than 85% of the project's capital costs and 80.5% of its operating costs, according to Thacker Pass' feasibility study updated in October. Costs include plans to build a facility to process sulfur into sulfuric acid on site, which would help shield the company from the price volatility that would come from buying the input on the market.

"This project wouldn't work everywhere. I don't know if they were in Bolivia or Argentina with this kind of deposit, which requires this much power and this much up-front capital, whether it would actually get built," said Joe Mazumdar, editor and analyst at Exploration Insights.

The US Bureau of Land Management approved the project in January 2021, despite opposition to the project from local Indigenous communities over land, energy and water use, and a US appeals court blocked a bid by environmentalists and tribes to overturn the decision. The government now appears ready to write a check.

"It's a 'strategic critical mineral' for the US, as in, one that they're really worried about, like rare earths," Mazumdar said.

President Joe Biden has made establishing a US supply battery supply chain a top priority, and Thacker Pass is the largest and most shovel-ready lithium project in the country. The Inflation Reduction Act authorized billions of dollars to support these projects, and the DOE's loan office is the key vehicle for moving those funds. The DOE's Loan Programs Office said its talks with Lithium Americas are confidential.

"It's going to get funded. It's just a question of how," Klein said.

S&P Global Commodity Insights produces content for distribution on S&P Capital IQ Pro.