Monsters of Rock: Full or not? Brokers weigh in on Albemarle’s REJECTED $5.2bn bid for ASX lithium developer Liontown
For the believers it has been an incredible story. Liontown Resources (ASX:LTR) shares, worth just 3c in 2018, have risen 8,550% over the past five years.
After three stabs at the target, deep-pocketed US$26 billion capped American lithium beast Albemarle was rejected in its $2.50 a share bid for the owner of the $895 million Kathleen Valley lithium mine, one of the few Tier 1 lithium assets slated to open in the coming years with a nameplate capacity of 500,000t of spodumene concentrate per annum.
Albemarle would be paying $5.2 billion CASH for the shares it doesn’t own in LTR. It has been raiding the share register in recent weeks, mopping up 2.2% of the company, whose major shareholder is chairman and Perth mining identity Tim Goyder.
The owner of the Greenbushes lithium mine and Kemerton lithium hydroxide plant in WA’s South West, ALB’s offer shows just how much the recent lithium boom has moved the needle for the sector as electric vehicle sales in China, Europe and elsewhere have exploded.
In 2019 Wesfarmers paid just $776 million for Kidman Resources, owner of half of the Mt Holland Lithium mine, due to open around the same time as Kathleen Valley in the first half of next year.
While the Kidman stake comes with smaller spodumene output, it has built in 50% ownership in a downstream lithium hydroxide plant under construction in Kwinana with JV partner the Chilean SQM.
The question is, for Liontown does the story end here?
Its shares rose again today after charging to close and passing the 63% premium offer by Albemarle yesterday at a record $2.57. Now $2.60 per share, investors are plainly looking at the prospect of a raised offer from Liontown’s unrequited suitor – maybe some roses, a sonnet or a goat to go along with its $2.50 dowry – or a better offer from an equally cashed up interloper.
If it can nab Liontown, Albemarle will get 500,000t rising to 700,000tpa of spodumene capacity starting in 2024, with a downstream plant churning out in the order of 85,000t of lithium hydroxide from 2029.
But it also has synergies to find in Kathleen Valley. The bulk underground development could present as a close source of feed for its 85% owned Kemerton plant in WA, primarily fed for now by its 49% stake in the Greenbushes operation.
Liontown for its part says the bid is opportunistic in light of the recent slide in equity values across the lithium space, and does not acknowledge its scarcity value, potential to generate early income by starting with DSO sales and the attractiveness of its product to American OEMs, who will receive tax credits in line with the Inflation Reduction Act if they use batteries made with Liontown’s lithium.
Just about every broker under the sun has had their say on the potential takeover.
Here are a few highlights:
UBS has a buy rating and $1.85 price target on Liontown along with a neutral rating on NYSE listed Albemarle.
They say the offer seems “pretty full in our view”.
“ALB earlier indicated that it believes lithium resource development costs could range in the $5-25kt/ton of lithium carbonate equivalent (LCE),” analysts led by Joshua Spector said.
“At 85 kT of LCE capacity and the high end of that range, that would imply a value of (US)~$2.1B.
“There are other projects in development, and perhaps room to expand spodumene production which we have not considered.
“However, on planned spodumene production, ALB’s current offer appears to reflect a ~$1.3B premium to a potential greenfield development cost.
“This premium could also reflect utility/infrastructure investments made to support eventual lithium hydroxide facilities (or value of off-take contracts).
“Based on high end ALB cost estimates (generic example), 85kT of lithium hydroxide production facilities could cost ~$2.5B in additional spend (85kT x $30k/kT LCE).”
Canaccord lifted its price on LTR from $1.75 to $2.50, maintaining a speculative buy rating.
Its analysts, led by Reg Spencer, say the bid may represent fair value, but agreed with LTR’s assessment of it as “opportunistic”.
“On our numbers, the proposal by ALB implies pricing of ~US$1,750/t SC (~US$24,000/t LiOH) to deliver a NAVPS equal to the bid price (CGe LT of US$1,500/t SC and US$22,500/t for chemicals),” they said.
“While we recognise the deal may represent fair value compared to our risked NPV valuation, we agree that it is also somewhat opportunistic given the recent equity pullback experienced by the sector as lithium pricing eased.
“ALB stated that it is “prepared to engage immediately in discussions with LTR to work toward a mutually acceptable agreement”, and ALB’s recent on-market purchases (up to 5%) of LTR stock suggest it is committed to pursuing a potential transaction, and may return with a higher bid.”
The bid also provides an indication, CG says, on where the majors think prices will end up long term.
“It may also impact lithium markets as consumers think about the loss of an independent lithium producer and become concerned around project timelines. If this were the case, it may provide some support to pricing,” they said.
“Given that on average our coverage list is trading at levels that imply average pricing of ~US$1,150/t SC (~$17,000/t LCE) vs ALB bid of US$1,750/t SC (US$24,00/t LCE), it suggests that overall, lithium companies remain “undervalued” even if we assume further downside to current “spot” prices.”
You can check out some of Reg’s thoughts on the takeover tumult with Reuben Adams below.
US analysts for Japanese brokers Mizuho Securities were less kind on the valuation.
“We suspect Li bulls will give the “benefit” of the doubt (even at a slightly higher price point), but given the degree of uncertainty, project timeline and original CAPEX, we’ll politely refer to the offer as generous,” they said.
“ALB cites LTR’s board has not engaged – thus ALB is now appealing to LTR shareholders to facilitate a transaction.
“We suspect ALB is going to pursue fairly aggressively. Our knee-jerk reaction is the proposed price appears slightly high, though there will be ongoing investor debates re: scarcity value of an asset such as this one.”
RBC’s American-based analyst Arun Viswanathan says investors may not look favourably on ALB were it to make another attempt at a deal at an increased offer price given lithium prices are falling.
If they continue to fall projects like Kathleen Valley could be available cheaper later in the year, according to Viswanathan, but there are positives as well, he noted.
“With that said, if the deal did go through, we see three positives: 1) ALB would increase its backward integration and have greater access to spodumene resources, 2) ALB would gain more control over how much supply comes online, and 3) ALB would have greater control of when new supply comes online.
“Recall ALB had ~200ktpa LCE of conversion capacity in 2022 ramping to 500-600ktpa by 2030e, and therefore is likely interested in securing more spodumene resource capacity.”
Jarden’s Jon Bishop and Ben Lyons say that without the lure of a takeover offer Liontown would have a number of hurdles to overcome, including a potential funding shortfall and higher operating costs after the award of an underground mining contract for Kathleen Valley.
“In our view, ALB could solve the funding shortfall issue and perhaps – within a bigger entity – the operating and execution risks may not be as pronounced,” they said.
“However, it is important for LTR holders to recognise that the cash offer – albeit highly conditional – represents a substantial premium to the recent share price range as well as increased certainty (vs the uncertainty that had both impacted the macro and that comes with new developments).
“Therefore, we estimate the offer implies a substantial premium in terms of long-term SC6.0 prices when compared with our forecasts (US$1,400/dmt – a healthy incentive price for all hard rock projects we have reviewed globally).”
“Upside risks to our rating in the short-to-medium term rest ostensibly with potential emergence of a competitive process for control of LTR and perhaps delivery of a technically plausible commercialisation strategy for the DSO concept.
“We remain steadfastly of the view that without corporate interest present, LTR has a number of organic hurdles to overcome before realising upside valuations for its Kathleen Valley development and potential downstream ambitions.”
While Albermarle has signalled its willingness to discuss a mutually beneficial deal with Liontown while criticising its board for declining to engage with its three previous offers of $2.20, $2.35 and $2.50 a share, Morgans analyst Max Vickerson says its hard to see a markedly higher bid coming in.
“We revise our rating to HOLD given the strong share price performance which has exceeded our DCF valuation,” he said.
“We note that we have used conservative operating cost assumptions in our estimates but KV’s operating cost would have to be market leading for our DCF to meet the recently rejected bid.
“It is quite possible that ALB will lift its offer, or a third party comes forward to compete with it.
“However, given the significant premium to its trading range and the much smaller discount to established, operating peers, we think it’s harder to see a markedly higher bid to justify investors increasing their stake.”
Bell Potter is among the most bullish brokers on Liontown, having previously had a $2.81 price target (now a whopping $3.35). However, given Liontown is still in development their risk rating on the stock is ‘speculative’.
They say the proposal looks “reasonable but not full”.
“On commonly viewed EV multiples, the proposal look reasonable, but not full,” they said.
“We expect as Kathleen Valley nears production, LTR’s multiples should continue to re-base towards the higher end of its peers.
“ALB’s focus is Kathleen Valley, not LTR’s downstream potential: The value ALB has been willing to propose would largely be focussed on its assessed value of LTR’s 100% owned Kathleen Valley mine, with minimal allowance for the asset’s downstream processing potential.
“ALB already has downstream processing capacity in Western Australia and could expand these operations to accommodate Kathleen Valley concentrates.”
Bell Potter says the corporate interest in LTR speaks to Kathleen Valley’s quality and the scarcity of growth opportunities in the lithium sector.
“We view the value of ALB’s proposal as reasonable, but not full; additional value to be argued from LTR’s de-risking of Kathleen Valley, downstream projects and complementary ESG strategy and location.
“We also believe LTR will ultimately be capable of realising this value in the absence of a corporate tie-up.”
Lynas Rare Earths (ASX:LYC) shares fell 1.8% today.
It hosted analyst and broker types at its Mt Weld mine and concentrator in WA on Monday, according to Goldman Sachs, who say the possibility of a suspension in the December half at its LAMP processing plant in Malaysia is becoming very real.
The company faces a deadline of July 1 to end imports of lanthanide concentrate and the cracking and leaching component of its separation of rare earths oxides at Kuantan.
While work is ongoing to initiate that step at a processing facility in Kalgoorlie, the plant is not expected to be in operation until the December quarter, GS analysts Paul Young, Caleb Heiner and Hugo Nicolaci say.
The site visit was focused on the expansion of the Mt Weld mine to a throughput of 1.3Mtpa, which will see Lynas aim for 12,000tpa of NdPr production by 2025.
“While the visit confirmed that the expansion of Mt Weld is broadly on track for commissioning in Dec H 2024, discussions also confirmed that first Rare Earth (RE) feed into the Kalgoorlie Cracking & Leaching (C&L) facility is now not expected until the Dec Q (vs. prior guidance of Sep Q), indicating a full shut down of the Lynas Advanced Materials Plant (LAMP) refinery in Malaysia during the Dec H is now likely in our view based on product inventory and material flow,” GS’ boffins said.
“This is a further delay to our previous estimate that LAMP would need to be curtailed for only three months.
“We now expect that LAMP will need to shut-down for around four to five months during Dec H.
“The further delay to Kal C&L commissioning matches with the channel checks we completed with contractors while in Perth last week, which indicated the plant would not be producing carbonate this year. We revise our FY24 NdPr production to 2.4kt (from 4.6kt).”
While it has faced political opposition for over a decade Lynas has long maintained its low-level radioactive waste poses no environmental or health risks to its local community and that it has been a safe operator since opening the facility in 2013.
GS has a neutral rating on Lynas, but reduced its price target 12% to $6.60.
Meanwhile, Jervois Global (ASX:JRV) suffered a far bigger hit, after a big drop in cobalt prices prompted the cobalt and nickel producer to suspend its construction work at the Idaho Cobalt Operations.
The company’s stock fell a hefty 41.7% as of 4pm AEDT.
“Jervois has determined that not mining ICO cobalt at cyclically low prices, will preserve the optionality and inherent strategic value of ICO for shareholders and key stakeholders including local communities and the State of Idaho,” JRV CEO Bryce Crocker said.
“The Company also views not mining ICO at current prices is consistent with US Government critical mineral policy objectives.”
Opened to much fanfare last year, the mine in Salmon, Idaho, was expected to produce 1915t of cobalt, 2900t of copper and 6700oz of gold per year with an initial seven-year mine life and was to be the US’ only primary domestic source of mined cobalt.
Used in EV batteries, three-month LME cobalt is currently fetching US$34,180/t, down hard from over US$80,000/t at this point last year.
Jervois stock has fallen over 90% in the past year, outpacing the decline in its main commodity. Ouch.