Monsters of Rock: Experts weigh in on Rio's $10bn Arcadium Lithium deal

Experts and more weigh in on Rio’s $10bn bid for Arcadium Lithium
Rio could be expecting lithium chemical prices to almost double long term based on the deal price
Questions raised over whether Rio will realise synergies and cut payouts

The ink is barely dry after Arcadium Lithium (ASX:LTM) put pen to paper on a $10 billion (US$6.7bn) contract to trade the Yank and Australian lithium miner to Rio Tinto (ASX:RIO) and already the experts are weighing in.

READ: Rio gets its lithium deal in planned $10bn Arcadium takeover

Takes range from ‘opportunistic’ – with a number of shareholders taking to forums ranging from Twitter/X to Blackwattle Investment Partners’ open letter writing campaign calling on shareholders to vote down the transaction – to positive for LTM to positive for the broader lithium market.

One interesting aspect is the value the deal implies vis a vis long-run lithium prices.

In a note published this morning, E&P Capital’s Adam Martin wrote that the deal “highlights the medium-term fundamentals of the lithium market”.

He added: “Rio has clearly done a lot of work here and in the investor pack highlighted the “steep” cost curve for lithium and drew parallels with the copper cost curve.

“The lithium market remains relatively small with few players, meaning the likelihood of additional M&A could increase.”

But there are concerns regarding Rio’s potential to bring forward 50,000tpa of new lithium carbonate equivalent output from Arcadium’s portfolio with its deep balance sheet, adding 4% of global supply on top of a currently flooded market.

Yesterday Arcadium boss Paul Graves suggested the addition of low-cost supply would have little impact, with demand growth to send lithium markets into deficit later this decade.

“In the longer term, there is risk that Rio’s expansion into lithium could keep markets well supplied, lowering long-term price estimates,” Martin said.

“We think this will take a number of years to play out and will depend on the rate of demand growth. We retain our Positive view on Pilbara Minerals (ASX:PLS) and Mineral Resources (ASX:MIN).”

The deal adds to recent bottom-of-the-cycle M&A including Pilbara’s $560m scrip offer for Latin Resources (ASX:LRS) and comes after a +80% dive in lithium chemical and concentrate prices – from over US$80,000/t and US$8000/t in late 2022 to ~US$10,000/t and US$800/t currently – tanked sector valuations.

Strategic rationale

On Rio’s end, RBC’s Kaan Peker cut its price target by 2% to $125/sh and lifted LTM’s to the US$5.85 offer price. Its share rose 31% to US$5.55 in New York overnight, rising ~39% in Oz to $8.20.

Peker attributes the premium offered by Rio (90% to LTM’s US$3.10 undisturbed pre-bid price and 39% to VWAP since Allkem and Livent merged to form Arcadium in January) to synergies from their combined operations in Argentina and Canada and adoption of direct lithium extraction technology.

The undisturbed value RBC held on LTM was at US$3.10/sh based on long-term carbonate pricing of US$15,000/t and long-term spodumene concentrate of US$1250/t.

Peker said the deal implies Rio is more constructive on the long-term outlook for lithium pricing.

“The deal implies an 2025e EV/EBITDA multiple of 25x on our deck or ~40x at spot (US$10,400/t carbonate). Based on our assumptions, RIO’s offer is discounting a carbonate price of ~US$17,600/t, and spodumene of ~US$1470/t into perpetuity (stand-alone, assuming no synergies), a premium to our long-term forecasts,” he said.

“However, our ALTM valuation does not include Fenix stage 2 (we only include Stage 1A/1B), and Galaxy stage 2. We factor in upside/optionality with the Argentinian brine operation via an EV/resource given its large resource base.”

Goldman Sachs thinks Rio is pricing in even higher lithium on Rio’s deal, up to US$19,370/t carbonate, down to US$17,700/t should Rio go hard and fund Wave 2 expansion projects at Galaxy Stage 2, Cauchari and Fenix Stage 3.

In the broader scheme of things Rio would become a top 3 global lithium producer alongside Albemarle and SQM with 250,000-300,000tpa LCE production assuming Arcadium’s growth projects are all developed and Rio can expand its own Rincon brine project in Argentina – due for FID this year – to 50-100,000tpa LCE.

“This would make Rio a top 3 global producer and would make lithium around 5% of Rio’s EBITDA by 2030, still insignificant versus iron ore, copper and aluminium, but on the pathway to a possible 10% on a longer term view (Rio expects ALTM’s capital requirements represent ~5% of their group capex of ~US$10bnpa in CY25/26, before any project re-acceleration),” GS analysts led by Hugo Nicolaci said.

“Separately, we also still see the possibility of Rio forming a JV with Codelco in Chile that could see it vend its DLE technology and help fund early-stage project development.”

Are the synergies real?

But RBC thinks Rio could be overpaying for supposed operational synergies.

“Does Rio’s offer overpay for synergies? We think so, but it’s hard to be definitive, particularly given the possible use of DLE technology,” Peker said.

“Our stand-alone valuation for ALTM was $3.5b. If we include the acceleration of ALTM’s growth pipeline (as outlined below), this adds an incremental $0.4-0.6b to our ALTM NAV, leaving $2.7b of “synergies” required to justify the transaction (~$6.7b).

“Given the cost base and size of ALTM’s assets, synergies (beyond pulling forward growth) will likely need to be both on revenue and costs, and will likely take longer than 3-5 year to realise. Moreover, under this scenario Rio takes on significant project execution risk.”

Peker also thinks the net debt growth taken on to support the deal could see dividends cut from the upper range of 60%. RIO has recently been returning to 50-55% until net debt falls from a projected post deal and growth capex range of US$12-14bn to below US$10bn. If lithium prices surprise to the upside this could change, but RBC is not bullish on that prospect.

“The combined lithium assets comprise ~4% of our RIO NAV (Iron ore ~56% NAV) and 4% of our 2028E EBITDA,” Peker said.

“With lithium prices expected to remain depressed for the next few years (forecast surplus market), we forecast ALTM’s CY25 EBITDA to be only ~$0.3bn but grow to ~1.1bn by 2028–29 namely on production growth.”

The deal has seen a number of lithium players run higher today, though not in the same stratosphere as LTM.

Liontown Resources (ASX:LTR) was up 5.7% today, with Wildcat Resources (ASX:WC8) 18.5% higher and the Canadian and US pairing of Sayona Mining (ASX:SYA) and Piedmont Lithium (ASX:PLL) rising 6.3% and 10.8%, respectively.

Fellow big four lithium stocks IGO (ASX:IGO), MIN and PLS were up 1.7%, 6.8% and 2.5%, respectively, though that was aided by a broader move upwards for large cap miners, with materials 1.6% higher today.

What else is going on?

Oh, there are some other stories going around the WA large cap resources space today. Metals Acquisition (ASX:MAC) fell over 11% after raising $150 million at $18 a share, a 13% discount to its last trading price of $20.70.

The company’s plan is to retire its US$145 million mezzanine debt facility early. Without repayments to strangle it the company will be better placed to pursue assets outside the CSA Cobar copper mine it acquired from Glencore last year.

The company will have US$177m in cash and have an undrawn US$25m revolving credit facility on hand with net debt of US$134m before costs.

CSA produced 10,159t of copper at 4% Cu at cash costs of US$1.90-2/lb in the September quarter, keeping MAC on track to hit the mid-point of guidance of 38-43,000t.

Regis Resources (ASX:RRL), meanwhile, lifted 4% after adding $85m in cash to its balance sheet ($380m), surprising to the upside on output from its Duketon and Tropicana mines by pumping out 94,500oz of gold.

RRL is aiming to produce 350-380,000oz this financial year.

And mining services player Perenti (ASX:PRN) lifted over 2% after its subsidiary Barminco won a $157m, 29 month contract for underground mining at the Nova nickel mine, taking its involvement at the project effectively to the end of the orebody’s life.