The frenzy surrounding small cap lithium exploration and development companies appears to be slowing following nearly two weeks of relative insanity. With reality setting in and clearer minds prevailing many of the companies that registered staggering trading volume and inflated share prices are now finding themselves right back where they were at before the craze began. American Lithium Minerals (OTCBB: AMLM) is one such lithium exploration and development company, having sunk to a 52-week low of 0.25 on April 27, 2011 with trading volume of just under 200,000 they shot to 0.795 on April 29, 2011 on trading volume of 6.9 million. By the next trading day they were down to 0.32 and are now moving around the 0.34 – 0.38 range with volume at a relatively low 300,000.
It would be one thing had AMLM actually released any news prior to the surge but the reality is the shares simply benefited from the meteoric rise of Lithium Exploration (OTCBB: LEXG) on April 28, 2011. LEXG had been part of a significant promotion and shot to an unexplainable 10.69 despite operating without revenue and having no real evidence that they were even close to producing lithium for development. As investors saw LEXG climb they quickly jumped for other companies in the lithium industry and AMLM was a beneficiary but looking at their financial condition and prospects has revealed little in terms of future success and the road ahead may be difficult.
Most troubling for AMLM, along with the other small cap lithium stocks, is the fact that there is a sufficient lithium supply already being produced by the dominant players in the industry. AMLM says they are focused on the development of lithium and boron resources in Nevada yet lithium is really what they are after. Unfortunately for them companies like FMC Corporation (NYSE: FMC), Rockwood Holdings (NYSE: ROC), and Sociedad Quimica y Minera de Chile (NYSE: SQM) are all in position to meet the current demand and while that demand is expected to climb with the push for more electric cars and lithium ion batteries along medical benefits there is no reason to believe that these companies can’t expand their supply.
Of course AMLM is an exploration and development company and so investors aren’t necessarily concerned about the immediate market but rather where it will be years down the road. That makes sense and if AMLM had a viable lithium development plan in place then it certainly could warrant a spike in share price. The only problem is they don’t seem to have that plan. It seems that AMLM is playing on the belief that U.S. initiatives into more green-friendly energy alternatives will be enough to ignite their shares but results have to be produced. Yes there is legislation and long-term energy policies that will depend on lithium but if a company can’t produce lithium then they really have no value in that industry.
American Lithium’s most recent press release, dated April 8, 2011, concerns an agreement to a private placement investment in the amount of up to $500,000. That investment comes in the form of a secured promissory note that is convertible into just over 1.8 million common shares and bears interest at a rate of 4% annually. Along with that, the investor also receives a one year warrant to purchase an addition 1.8 million common shares at 0.27 per share.
Now the proceeds will be used to develop existing properties and continue with the “acquisition strategy of potential world class lithium projects” according to CEO Hugh Aird. The problem with this is exploring and developing lithium properties can be an incredibly expensive endeavor and take a considerable amount of time, meaning the proceeds raised simply aren’t enough to start generating revenue, something that has escaped the company thus far.
To give a better understanding of the costs involved AMLM was involved in a $4.5 million exploration and development program aimed at completing an economic pre-feasibility study on the Borate Hills Project to advance the project to the feasibility stage.
To their credit AMLM has announced the drill results from their drill holes at the Borate Hills Project in Nevada and they have revealed significant intercepts of Lithium and Boron mineralization. Again, the problem is extracting the lithium which is a lot more difficult than identifying its presence.
Even if AMLM takes the action of developing these lithium properties it will require additional financing that can only come in the form of additional shares being sold, further diluting the value for shareholders and not guaranteeing anything positive from that action. AMLM is considered a substantial doubt as a going concern and the likelihood that they ever reach production levels appears slim
The truth is lithium exploration and development for small cap companies is a long-shot what drives share prices up is rarely something that is substantially newsworthy. AMLM jumped because of a promotion involving LEXG and while that spike may have been a welcome surprise to shareholders the individuals who bought at the high-end of that spike may be waiting a long time before their shares see anything close to that level again.