Rio Tinto considers bid for Arcadium Lithium

Rio Tinto is considering a bid for a New York-listed lithium miner as the world’s largest commodities groups race to secure metals and minerals powering the world’s shift to clean energy.
A successful deal for Arcadium Lithium would catapult the world’s second largest miner into the ranks of the world’s top producers of the metal used in electric vehicle batteries and power storage.
Rio said it had made an approach to Arcadium regarding a potential acquisition, adding: “The approach is non-binding and there is no certainty that any transaction will be agreed to or will proceed.”
Buying Arcadium would give Rio access to lithium mines, processing facilities and deposits in Argentina, Australia, Canada and the United States, and to a customer base that includes Tesla, BMW and General Motors. The combined group could account for some 10 per cent of global lithium chemicals supply by 2030, analysts at Canaccord said.
A sharp drop in lithium prices, due in part to oversupply by China and falling demand for new electric vehicles, has resulted in a 39 per cent fall in Arcadium shares since the start of the year. Lithium demand is forecast to grow sharply, however, on the back of growth in the use of lithium-ion batteries.
Rio has two lithium projects, Rincon in Argentina and Jadar in Serbia, but neither has a start date for production to start. Jadar has been beset by delays amid environmental protests although the government reinstated Rio’s licence in July. Annual output for both mines is expected to be about 58,000 tonnes a year.
Arcadium produced 20,100 tonnes of lithium hydroxide and carbonate during the first six months of the year and 53,500 tonnes of spodumene concentrate, a key source of lithium.
Jakob Stausholm, Rio’s chief executive, said at the company’s first-half results in July that lithium assets were more attractive after a fall in the price.
The Danish executive, 56, has signalled that he is more willing to pursue bigger deals, telling analysts in July: “We can do it”, but added, “it’s not easy to justify big premiums and we are definitely not in the M&A game in order to be bigger. We are only in the M&A game if we can create shareholder value”.
When asked about the attractions of the lithium market, Stausholm said: “It’s fair to say that it’s certainly cheaper than a year ago. We really have to think about what’s going to be the average price over the next 10, 15, 20 years.”
Reuters reported last week that the companies had been holding talks about a deal that could value Arcadium at “$4 billion to $6 billion or higher”.
Andy Forster, a portfolio manager with Argo Investments, which holds shares in both companies, sounded a cautious note around high valuations for Arcadium, noting it had many growth projects but not the balance sheet to build them. “The economics of long term pricing for lithium is not what it has been,” he said.However, Blackwattle Investment Partners in a letter to Arcadium said any offers in the reported range would “significantly undervalue” the company. “In our opinion, a sale price for LTM should be closer to $8 billion, and LTM should be willing to walk away from an opportunistic offer,” Blackwattle said.
Several miners have been looking for deals to secure the metals needed for the transition to low-carbon energy sources. In May, BHP made a failed £39 billion bid for Anglo American in an attempt to gain access to copper, which is used in green technologies including electric vehicles, wind turbines and energy networks.
Anglo’s mines in Peru and Chile are capable of producing about 760,000 tonnes of copper annually. Rio has three copper projects in Australia, America and Mongolia, where it is expanding the Oyu Tolgoi mine to a capacity of 500,000 tonnes a year between 2028 and 2036, having started production in March last year.
The Australian shares of Arcadium rallied as much as 50 per cent to A$6.29, triggering a jump in other Australian-listed lithium companies. In New York, Arcadium shares rose by 35.4 per cent to close at $4.17, valuing the company at $4.5 billion. In London, Rio Tinto’s shares closed flat at £53.00.
The world’s largest miners are racing to boost their exposure to the metals and minerals regarded as key to powering the energy transition (Emma Powell writes).Rio Tinto’s approach for Arcadium Lithium, a lithium mining and processing company listed in New York and Australia, would expedite the FTSE 100 group’s push into lithium, a key ingredient in batteries for electric vehicles.Rio has two lithium projects in the works — Rincon in Argentina and Jadar in Serbia — but neither has a start date for production. Arcadium produced 20,100 tonnes of lithium hydroxide and carbonate during the first six months of the year and 53,500 tonnes of spodumene concentrate, a key source of lithium.Rio’s interest is “opportunistic and countercyclical”, according to Kaan Peker, an analyst at RBC Capital, the brokerage. A glut of Chinese supply in the market and slower demand for electric vehicles has caused lithium prices to slump over the past 18 months. Lithium carbonate prices now stand at $10,800 a tonne, down from more than $80,000 at the end of 2022.Arcadium said that it would cut spending by $500 million over the next two years in response. A takeover by Rio could remove the constraints on Arcadium’s production growth, according to Peker. Rio’s low gearing, which stood at 8 per cent at the end of June, means an all-cash offer is likely, he thinks. After building in a 30 per cent bid premium an offer could emerge at $4.6 billion, which would still only be roughly in line with its valuation in May. It also means Rio could pick up Arcadium at a lowball price. The New-York-listed shares have fallen 36 per cent this year, even after a bounce of more than 40 per cent after Rio’s interest emerged.Expanding its exposure to lithium organically has been complicated by protests against the Jadar mine by environmentalists. The mine is set to have a capacity of about 58,000 tonnes a year. Rincon is likely to have a similar level of output.Despite the downturn in prices, Rio is playing the long game. The demand for lithium is forecast by the World Economic Forum to reach 1.5 million tonnes of lithium carbonate equivalent by 2025 and more than 3 million tonnes by 2030, compared with production of about 180,000 tonnes last year.