Monsters of Rock: Rio goes all in on lithium

Rio Tinto will spend US$2.5 billion in a punt on a new lithium brine operation in Argentina
It comes with market prices depressed, as Rio looks to capture an uptick in the next cycle
Analysts are cautious, with Rio rolling out new technology in the 60,000tpa Rincon development

Monsters of Rock drills deeper into the ASX’s large cap mining stocks with mining scribe Josh Chiat

Rio Tinto (ASX:RIO) has gone all in on its counter-cyclical lithium gamble, putting faith in its deep pockets to emerge from the other side of the downturn as a dominant player.

While it continues to progress its $10 billion takeover of Arcadium Lithium (ASX:LTM), a deal that promises to revive a swathe of expansions the cash-strapped lithium pure play had put on ice amid falling prices, it’s latest move shows its conviction in an optimistic outlook for the battery metal.

Oversupplied due to expansions in China, WA and Zimbabwe, Rio nonetheless sees long term demand increases in lithium, expecting consumption to lift fivefold by 2035 as electric vehicle and battery storage penetration expands.

It will spend US$2.5 billion (A$3.9bn) building a 60,000tpa direct lithium extraction project in Argentina at Rincon, following the delivery of first lithium carbonate recently from a 3000tpa pilot plant.

Work on the full-scale plant will start in mid-2025, assuming Argentine authorities deliver the permits on time.

A three year construction period would follow, with three years of ramp up to come after.

That means Rincon will be in full swing from 2031.

“The attractive long-term outlook for lithium driven by the energy transition underpins our investment in Rincon. We are dedicated to developing this tier 1, world-class resource at scale at the low end of the cost curve,” Rio CEO Jakob Stausholm said.

“We are equally committed to meeting the highest ESG standards, leveraging our advanced technology to halve the amount of water used in processing, while continuing to grow our mutually beneficial partnerships with local communities and Salta province.

“Building on Argentina’s supportive economic policies, skilled workforce, and exceptional resources, we are positioning ourselves to become one of the top lithium producers globally.

“This investment alongside our proposed Arcadium acquisition ensures that lithium will become one of the key pillars of our commodity portfolio for decades to come.”

Analysts cautious

Despite the project’s approval analysts are still cautious to put Rincon into their base case for Rio.

RBC’s Kaan Peker pointed to technology risks given the novel nature of the Rincon DLE project, which will eschew the long lead times required via the traditional method of evaporating brines in the sun.

“For growth from 2028 through 2033, RIO has flagged a total capacity expansion to ~460ktpa (lithium carbonate equivalent, which involves the use of Direct Lithium Extraction (DLE) to unlock capacity in Argentina and Jadar,” Peker said.

“Our valuation includes the Arcadium transaction, but we do not include Rincon or Jadar. Specifically for Rincon, given the novel nature of technology, we will wait for the starter plant to achieve nameplate production sustainably and achieve battery-grade production.

“First lithium has been achieved at Rincon from the 3ktpa pilot plant, with the starter plant scheduled for completion in the 1H25.”

If it does work, RBC estimates the project will come in at a capital intensity of US$44,000/t, with an IRR of 15% and NPV of US$4bn, though the IRR lifts 2-3% with the Regime for Large Investments rule brought in by the new government of Javier Milei.

Incentives in the package for projects of more than US$200m with at least 40% of the investment made in its first two years and 20% sourced from local suppliers include a corporate income tax rate of 25%, down from 35%, accelerated depreciation for equipment purchases, and 100% of export revenue in US dollars from year 4, though provinces could have the right to increase royalty rates from 3% to 5%.

Rio says the mine, backed by a 40 year life and 2.07Mt LCE reserve at 350mg/L, will be in the bottom quartile of the cost curve.

Other large cap news

So far on Friday, Rio is down 2.26% on the news, with other lithium stocks Pilbara Minerals (ASX:PLS), Mineral Resources (ASX:MIN) and Liontown Resources (ASX:LTR) in the red.

Elsewhere, South32 (ASX:S32) was down 0.87% on Friday despite saying approvals to open new mining fronts at its Worsley alumina operations would be coming from the WA Government later this month.

S32 had appealed what it claimed were onerous conditions that led to an impairment on the value of Worsley earlier this year, but said the Minister’s determination was a ‘positive outcome’.

“We are pleased to advise that the Minister has determined after considering available information, that the EPA’s assessment and overall conclusion that the project may be implemented, subject to conditions, is reasonable,” S32 said.

“Further, the Minister has agreed with the Appeals Committee’s recommendations to amend specific conditions based on the arguments presented during the appeals process, including by Worsley Alumina.”

South32 was sold off earlier in the week after withdrawing aluminium production guidance from its Mozal project in Mozambique where civil unrest is causing road blockages.

A similar situation saw Syrah Resources (ASX:SYR) call force majeure on shipments from its Balama graphite mine, forcing the company to engage with its loan funders in the US Government after triggering a default.

Back in Australia, Ramelius Resources (ASX:RMS) has released the pre-feasibility study for the Rebecca-Roe project in WA.

The 130,000ozpa is emerging as a critical development for RMS given the closure next year of its Edna May gold mine, which will leave Mt Magnet and its satellites as the gold miner’s only assets.

Speculation is rife though that it will look to bid on Northern Star Resources’ (ASX:NST) Carosue Dam gold project, which has an existing mill, airstrip and camp infrastructure, if NST looks to rationalise its portfolio after the $5bn scrip merger with De Grey Mining (ASX:DEG) closes next year.

A DFS and FID are due in July next year, with the mine expected to produce 1.1Moz over nine years from mid-2027.

An open pit ore reserve has been declared of 20Mt at 1.3g/t for 850,000oz, with underground reserves due with the DFS.

The ASX 300 Metals and Mining index fell 0.5% over the past week.

Which ASX 300 Resources stocks have impressed and depressed?

Making gains 🚀

WA1 Resources (ASX:WA1) (niobium) +8.6%

Develop Global (ASX:DVP) (copper/zinc/mining services) +8.4%

Patriot Battery Metals (ASX:PMT) (lithium) +6.9%

Mineral Resources (ASX:MIN) (lithium/iron ore/mining services) +6.8%

Eating losses 😭

Syrah Resources (ASX:SYR) (graphite) -27.5%

Chalice Mining (ASX:CHN) (PGEs) -14%

Alcoa Corporation (ASX:AAI) (alumina) -13.7%

ioneer (ASX:INR) (lithium) -11.1%

Develop shares climbed after Bill Beament’s copper hopeful announced the completion of documentation for a $100m loan from Trafigura, which will take production via an offtake deal over the first five years of its Woodlawn mine in New South Wales.

The production restart has been given the all clear to go ahead, with refubishment of the project’s copper-zinc processing plant now 50% complete and a final investment decision made.

““Our re-start study shows Woodlawn will generate pre-tax cashflow of A$1.1 billion based on a 10-year mine plan,” Beament said.

“At recent spot prices for copper and zinc, the first three years of post-ramp up production yields ~A$375m of free cashflow, providing substantial cash generation while repaying all the debt.”