Why Standard Lithium Plunged 25% Today

Shares of Standard Lithium (NYSEMKT: SLI) plunged 27.9% on Friday as of 11:43 a.m. ET.

Standard Lithium owns a large lithium mining operation spanning East Texas and Arkansas, and its stock has been the beneficiary of the government's recent focus on bolstering domestic sources of critical materials.

In late September, the Department of Energy said it would be taking a 5% equity stake in Standard Lithium's peer Lithium Americas. In response, Standard Lithium's stock rose along with that of Lithium Americas and other miners of critical materials.

But today, Standard Lithium is using its stock's surge to sell more equity to raise funds for operations.

Standard Lithium sells $130 million in stock

Last night, Standard Lithium announced it was selling nearly 30 million shares of stock at $4.35 per share, good for about $130 million.

Standard Lithium's stock closed the prior day at $5.39 per share, so this was a fairly large discount to the stock price at the time. Interestingly, after today's plunge, the stock trades below even the discount offered to the underwriters' clients.

However, shareholders really shouldn't have been surprised at Standard Lithium diluting them through an equity raise. The company holds potentially valuable leases, but only had $33 million in cash on its balance sheet at the end of the second quarter. Meanwhile, Standard Lithium is in a "pre-commercial" phase, which also means "pre-revenue." So it was highly likely the company would have to raise money at some point in order to fund its mining operations.

The recent stock rally was a great opportunity to do just that, without incurring any debt.

Image source: Getty Images.

Standard Lithium is another highly valued strategic asset

The Trump administration is aggressively looking to boost the U.S.-based supply of critical materials to become less reliant on China, and Standard Lithium is one of several speculative plays on critical minerals that have skyrocketed this year.

While it may be a good idea to have some of these stocks with strategic assets in your portfolio, many of these stocks have rallied tremendously this year based on non-fundamental factors. As such, they're risky bets at these higher valuations, as Standard Lithium showed today.

Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.