Shares of Brazilian lithium production start-up Sigma Lithium (NASDAQ: SGML) surged 13.1% through 10:25 a.m. ET on Tuesday morning, the first trading day since Bloomberg reported that electric car giant Tesla (NASDAQ: TSLA) may buy the company.
“Rampant demand” for lithium to produce electric car batteries lies behind Tesla’s bid, reports Bloomberg. Also helpful is the fact that Sigma Lithium’s biggest shareholder, private-equity fund A10 Investimentos, is reportedly looking to exit its investment and seeking a buyer for its 46% stake in the company. And yet, a sale is not assured.
Although Tesla declined to comment on Bloomberg’s story, the news agency reported that Tesla is actually considering several lithium investments in addition to (or as an alternative to) Sigma Lithium. Meanwhile, Sigma Lithium shares have already tripled in price over the past year, a fact that may incentivize Tesla to keep on looking in hopes of finding a cheaper way to get the lithium it needs.
All of this is to say that Sigma Lithium shareholders perhaps shouldn’t go counting chickens before they’re hatched. At the present time, this rumor of a Tesla buyout is just that — a rumor that may never come to fruition.
And consider the risks if a buyout does not happen. Valued in excess of $3 billion today, Sigma Lithium doesn’t actually have much to value its stock on: no revenue and no profits, naturally. Instead, Sigma Lithium lost more than $45 million over the last 12 reported months and burned through $62 million in negative free cash flow. Meanwhile, the stock has only $63 million in the bank and will probably be out of cash before the year is over.
That gives plenty of reason for A10 Investimentos to want to sell Sigma Lithium. But I’m not sure that it gives other investors much reason to want to buy Sigma Lithium stock.
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.