Lithium M&A surge has juniors buzzing about long-term demand

Lithium juniors say majors are showing their hand on their actual price expectations in a flood of M & A
Delta’s David Flanagan gets real excited about lithium deals
Patriot’s Blair Way says Rio’s view on lithium equities is wrong — company values will get higher

Lithium juniors say a wave of stunning mergers and acquisitions led by the industry’s biggest players are an indication they see prices staying higher for longer, as majors look to fortify their stronghold on the supply of the key electric vehicle battery ingredient.

In the past two months Australian developer Liontown Resources (ASX:LTR) has rejected a $5.5 billion bid from American lithium chemical giant Albemarle, rich-lister Chris Ellison and his miner Mineral Resources (ASX:MIN) have scuppered a $136 million bid for Norseman tiddler Essential Metals (ASX:ESS) by IGO (ASX:IGO) and its Chinese partner Tianqi, and Allkem’s (ASX:AKE) landed a $16 billion merger with Livent.

Delta Lithium (ASX:DLI) executive chairman David Flanagan, whose company controls almost 13Mt of spodumene resources at around 1.2% Li2O at the Mt Ida project in WA, says the consolidation push will give more pricing power to lithium producers already seeing high prices as demand from EV and battery makers outstrips supply.

He noted lithium chemical prices in China have climbed for eight straight days, after falling by more than 50% from highs of ~US$80,000/t to under US$30,000/t over the first four months of 2023.

“There’s massive volatility and there’s also a massive amount of lithium clickbait out there. So the world’s really interested in what happens with lithium and everything that happens to the price – up or down – is massively amplified,” Flanagan told Stockhead on the sidelines of the Resources Rising Stars Conference on the Gold Coast yesterday.

“Actually, I reckon there’s a lot more good times to come. I think there’s a lot less supply coming online than people think.

“I think there’s going to be consolidation in the sector, which is going to drive more anxiety on the customer side. And I think that if you have a smaller number of parties controlling more of the product, you’ve got more likelihood of having high prices.”

READ: High Voltage: (re)Introducing Delta, one of Australia’s most exciting lithium stocks

$80 billion super corridor

As an emerging lithium player — $260 million Delta has tripled in value since its move from gold to lithium as Red Dirt Metals in September 2021 — Flanagan is watching the Liontown bid closely.

LTR rejected offers from Albemarle at $2.20, $2.35 and $2.50 before the unsuccessful bid was revealed to the market.

It sent Liontown shares flying. Now worth $2.78 per share, LTR is believed to be holding out for more than $3 from ALB or another competitor, with chairman Tim Goyder saying yesterday at current spodumene prices the purchaser would pay off a $2.50 offer in just two years of its Kathleen Valley project’s 25-year mine life.

Flanagan reckons Kathleen Valley, due to open next year with a production profile in excess of 500,000tpa and with Elon Musk’s Tesla as a major customer, is worth far more.

He says the Albemarle offer implied a spoduemene (lithium concentrate) price of just US$1500/t, against current spot prices reported by Fastmarkets in excess of US$4500/t.

“I reckon the Liontown assets are awesome, OK, and I reckon that there is no way the long term spodumene price is 1500 bucks a tonne. No way,” Flanagan said.

“There’s no way you’re going to incentivise production to come online and meet demand (at that price). Okay.

“So if you value that thing using a reasonable long term price, it’s a steal at $3.”

Flanagan noted new spodumene supply was not coming online quickly.

“You’ve got Liontown then it’s us (Delta is planning to begin low grade DSO sales in 2023), then it’s years before the next one comes online,” he argued. He thinks $131m capped Essential Metals’ Pioneer Dome project, the subject of the failed bid from Greenbushes JV partners Tianqi and IGO, is also undervalued.

“I think people who are sort of outside the lithium space, invest in all sorts of other minerals, probably don’t realise the value of that ESS asset. Personally, I reckon you could have paid for that acquisition within 12 months,” he said.

“It’s really well located close to a port in a wonderful mining jurisdiction in Western Australia. And within the Tianqi-Independence joint venture, maybe there are some constraints on their business and some constraints on their growth.

“And this is a genuine opportunity for growth, and it dials them into what I’m calling the lithium super corridor. That area from Kathleen Valley at the top right the way down to Esperance, there’s a lot of lithium in there.

“And if there is ever a place to look where you could possibly create a super mega company, I mean like an $80 billion business, I reckon that it could come out of the Western Australian lithium sector.”

Demonstrating their bullish nature

Blair Way, the president and CEO of Quebec focused lithium explorer Patriot Battery Metals (ASX:PMT), says the fight to add lithium tonnes exposes how bullish the majors are on the future for the commodity, despite concerns from brokers the market could swing into oversupply in the next couple years.

“I think it’s demonstrating their bullishness in the actual future demand for lithium,” Way said.

“So if you’re a chemical company, you need feed.

“It is really good for the greater industry to see all of this manoeuvring around that; to me, some of this bad news about lithium prices going down and spot prices going down, it doesn’t sound like this behaviour is indicative of that.

“If it was they’d be waiting.

“Rio Tinto said, you know, ‘everything’s too expensive right now’, but I don’t think it actually is, I think it’s going to get more expensive, not less expensive.

“Realistically, that’s what the big diversified miners almost always do. They’re never the first movers. They’re big, lumbering giants, and they like to pay a premium so that’s what they do and you see it all the time.”

Speculation has been growing that Patriot — which yesterday surged over 15% on lithium hits grading up to 1.89% Li2O over more than 120m from its Corvette discovery in Quebec’s James Bay region — could become an acquisition target.

MinRes has been floated as one potential buyer, while $14 billion capped Pilbara Minerals (ASX:PLS), where Patriot chairman Ken Brinsden was famously managing director, is another candidate amid speculation both have crept onto the register.

A resource for Corvette is expected in July, with the dual-listed explorer’s C$1.85 billion market cap suggesting investors expect something big.

“I can’t comment on that (potential M&A), we’ve been very open and we have a good relationship with Pilbara obviously through our connections with Ken,” Way said.

“In my time in the saddle with Patriot I’ve reached out to Pilbara long before, even as Ken was still working there, to be able to have an opportunity to see what’s going on there.

“They’ve always been really gracious hosts to let myself and my geos come to site.

“There are a number of other companies in Western Australia who have done the same thing, so we’re friendly and open and receptive to people.

“But we’ve always said we need to do our work, we need to drill it out, we’ve got 50km of strike, we’ve really only drilled 4km of it, we just need the time and … all have been pretty respectful of it.”

READ: After rejecting a $5.5bn takeover, Liontown ‘life changer’ Tim Goyder continues to place his chips on lithium

Speaking of Pilbara Minerals

Pilbara’s chief development officer John Stanning told delegates at RRS yesterday “the best was yet to come” for the miner, which delivered a $1.24b profit and paid a ~$330m maiden dividend for the first half of FY23 in February on the back of record lithium prices.

Stanning warned it would not be easy for new spodumene producers to bring operations online.

“Now one thing I’d like to leave you with today, which I think is really important as you think about lithium investing, is lithium is a really hard mineral to concentrate. It’s not easy,” he said.

“We’ve got the scars to prove that. It’s taken us a long time to sort of perfect our operations and there’s not that many in production.

“So what that means for the market is lots of plans and I’m sure those projects will come in over time, but it’s not easy to ramp up these lithium projects to full production and, I’m not aware of too many that have come on budget, on time.”

READ: Ground Breakers: Australia’s big lithium miners rake in +$2.5bn profits as Pilbara Minerals pays first divvie

The company estimates between 13-21 copies of its Pilgangoora mine in WA’s Pilbara region near Port Hedland, where two consecutive expansions from 580,000tpa to 680,000tpa and then 1Mtpa have been approved, will be needed to feed long term demand for EVs by 2040.

“Most commentators are saying that they think prices will turn this year but what I am very confident about is the longer term outlook for lithium,” he said.

“We see a really material lithium deficit appearing.”

With the shortage of lithium tonnes and desperation of majors to claim more, juniors say third parties are now knocking on the door.

“I’ve never seen this before, so lithium companies you get a call — we’ve had a few calls from these big boys. And they say ‘Hi, can we have a meeting?’ And then you go ‘Yeah OK, we’ll meet with you’,” Delta’s Flanagan said.

“And then they say ‘Now, can we come into your data room?'”

“‘No, you can’t.’ But clearly, there’s a habit where a number of companies out there host some of these majors to site visits, they give them access to their data room, just to see what happens.

“But hello, why give that away for free? If they want to participate in your business, they have literally gotta stump up, go and buy some shares, buy a chunk of the company or come to us with a deal that shareholders would absolutely love.

“So that’s how I kind of answer the question and that hasn’t gone much further than that.”