Ground Breakers: Lithium M & A heats up as Allkem launches $15.8bn Livent merger
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Lithium bulls have had their necks craned in the direction of the proposed Albemarle buy up of Liontown Resources (ASX:LTR) in the hope the US lithium giant ups its bid or an interloper arrives to mop up the ~$6.3 billion Kathleen Valley project owner.
They should have been checking their shoulders, with two major lithium players ASX-listed Allkem (ASX:AKE) and NASDAQ listed Livent overnight announcing a US$10.6 billion tie-up ($15.8b) that will create the world’s third largest lithium producer behind Albemarle and Chile’s SQM.
56% of the new company, to be domiciled in Ireland … for reasons … will be owned by AKE holders, 44% Livent, with the combined entity to boost its lithium carbonate equivalent production capacity to almost 250,000tpa by 2027.
The deal is sensible from a number of perspectives. Owner of the El Fenix operation on the Hombre Muerto salar in Argentina, Livent is one of the few companies to have commercialised direct lithium extraction technology, a processing tech for brines that can extract lithium in hours and days as opposed to waiting for months to years to evaporate lithium salts in brine ponds.
Allkem wants to use that to back a Stage 3 expansion of its Olaroz project in Argentina which will grow from 25,000tpa at the completion of its conventional Stage 2 brine to 42,500tpa at full scale.
Collectively they also control the two most advanced assets in the James Bay region of Quebec, with AKE’s James Bay asset and Livent’s Whabouchi (held by its 50% owned Nemaska Lithium) forming the base of what is likely to be an integrated spodumene to hydroxide processing operation.
It will also own the outlying Mt Cattlin mine in WA, a holdover from Allkem’s 2021 merger with Australia’s Galaxy Resources, also the origin of its currently under construction Sal de Vida brine in Argentina.
That 56-44 split is where the question lies for analysts, and probably the accountants tasked with putting together the expert’s report for the deal.
RBC analysts estimate the deal, which has pushed Allkem shares up almost 16% this morning, represents a 7% premium for its shareholders assuming none of the aforementioned synergies.
The news has also, as an aside, led to some handy gains for junior explorers pottering around the Hombre Muerto and Olaroz brines.
Back to Allkem and it’s going to be bringing 163,000, or over two-thirds of the 248,000t LCE anticipated to be churned out by the merged player in four years’ time. It gets bigger, sure, with US$1.9b in revenue and US$1.2b in EBITDA on 2022 numbers as well as US$1.4 billion in liquidity to grow and chase its dream.
But the ratio has also brought a slew of questions from analysts on why AKE holders only get 56% of the entity.
There are two big benefits for Allkem out of the deal, RBC reckons. The first is the upside from the application of Livent’s DLE expertise at Olaroz and the nearby Cauchari project.
“Livent’s Hombre Muerto salar facilities (also in Argentina) uses Direct Lithium Extraction (DLE) technology to produce a lithium carbonate product, as well as smaller volumes of lithium chloride,” RBC analysts led by Kaan Peker said.
“Hence, the use of DLE technology to commercialise Olaroz stage 3 and Cauchari would be incremental upside to our base case.”
Then there is the broader ulterior motive of avoiding a hostile takeover from a bigger shark like Rio Tinto (ASX:RIO) or Zijin, both of whom are swimming in the waters of Argentina’s lithium triangle.
Rio in particular wants to use DLE to bring its Rincon project to market faster than a conventional brine operation, which may have made Livent as well as Allkem attractive to the global mining giant.
“With RIO acquiring Rincon (in 2022) and Zijin acquiring Neo Lithium Corp (in 2021) for the Tres Quebradas salt lake project, located in ‘Lithium Triangle’ in Argentina, we fielded questions whether AKE could be acquired,” Peker and Co. said.
“We think today’s merger announcement could provide more impotence for a possible outside bid. Furthermore, over the recent months, we have seen corporate action in the sector increase with Albemarle’s recent failed attempts to acquire Liontown.
“Today’s merger will likely further increase the focus on sector consolidation.”
Rio’s boss Jakob Stausholm doused expectations of a major splash in the lithium M & A market at the miner’s Perth AGM this month, following up his recent negativity on takeover activity in general by saying he was cautious on valuations in lithium right now.
Both Allkem boss Martin Perez de Solay and Livent CEO Paul Graves, who will steer the combined company while his colleague rides off into a very rich sunset, say the deal represents value not reflected in a simple mathematical formula.
Perez de Solay, for one, says Livent’s earnings were impacted by long-term fixed price contracts which will be replaced by deals that better reflect spot prices.
“The way the merger ratio was calculated was based on fundamental value for both companies and that incorporates the growth portfolio for both companies … and forward looking production and revenues that would come from both sides,” he said.
Graves says Livent is looking at five times volume growth from its own sources by the end of 2025, and says once prices are equalised with legacy contracts rolling up, the difference in EBITDA is not as substantial as they initially seem.
He says Livent’s DLE expertise meanwhile is about being able to build the process at scale, something not seen in other lithium companies.
“(DLE technologies) don’t fall down because they don’t work in the lab or that they fail sample testing. They fail because the manufacturing process is either not stable or not scalable and it’s really this ability to apply the technology into an existing process at scale, which is where almost all of them fall down,” he said.
“That is really the expertise that Livent has. It’s not some super magic sauce with regards to the actual DLE technology. It’s about making the processes run at scale.”
Silver Lake Resources (ASX:SLR) boss Luke Tonkin was once a steward of the Gwalia gold mine as the CEO of Sons of Gwalia, briefly helping administrators manage the failed gold miner after its infamous 2004 collapse before jumping ship for Mt Gibson Iron (ASX:MGX).
Tonkin has now made an aggressive play to snatch the asset from another gold executive with Gwalia in not only his past but his blood in Raleigh Finlayson.
Finlayson worked on the mine, run by Sons of Gwalia founders and uncles of his Peter and Chris Lalor, in the early 2000s. It seemed his explorer Genesis Minerals (ASX:GMD) had been successful in securing the famous but underperforming gold mine from St Barbara (ASX:SBM), which will snag some cash and move on to focus on its Atlantic gold operations in Canada and the Simberi mine in PNG.
Silver Lake had an initial offer knocked back by SBM’s board, which plans to see the GMD deal through. But it returned with a second proposal today.
The spex: $707m including $326m cash and 327.1m shares, with St Barbara keeping 7.5% or 94.8m of SLR’s shares worth around $111m to provide liquidity and working capital in its new life as an overseas gold miner.
The rest of the SLR shares issued in the deal would go in-specie to SBM shareholders.
An expert’s report will also no longer be required for the transaction, reducing the time risk.
SLR reckons this one is a 27% premium to the Genesis bid on the disturbed VWAP since it revealed its offer to the market on May 4. The GMD offer would marry Genesis’ Ulysses and Mt Morgans operations nearby with Gwalia and see SBM receive $370m in cash and 147.8m shares at an issue price of $1.15, along with performance rights to be vested in the event the Tower Hill project is developed.
“We’ve listened to the concerns of the St Barbara Board aired publicly about our original nonbinding proposal to buy the Leonora Assets and have addressed them,” SLR’s Tonkin said.
“By separating the issuance of the Silver Lake scrip component to St Barbara and its shareholders, we have shortened the time to completion and increased the liquidity available to St Barbara.
“The total consideration remains 27% higher than the consideration being offered by Genesis and provides incoming St Barbara shareholders with significant exposure to a genuine mid tier gold producer with a diversified and complementary portfolio of production, expansion, development and exploration assets.”
SBM and GMD are yet to give their takes on the revised bid from Silver Lake, which if successful would become a 400,000ozpa gold miner with three operations in WA and one in Canada.
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