Monsters of Rock: How soon is counter-cyclical lithium M&A? In the words of Morrissey: Now

Lithium sentiment gets a shot in the arm as Pilbara Minerals announces surprise $560m takeover of Latin Resources
Dale Henderson trumpets diversification strategy as Pilgangoora owner shuffles into Brazil
Iron ore off for a third straight session as steel sector woes in China ensnares iron ore and coking coal miners

Lithium juniors are, like the narrator of The Smiths’ classic How Soon Is Now?, just human and they need to be loved.

They haven’t for a while, with market valuations plummeting in line with prices, nerves on the electric vehicle thematic and soft economic conditions in the major growth centre of China torpedoing small caps.

A couple schools of thought on M&A: Do it at times like these, when valuations are under water so you can warehouse projects for the next boom or pick up a sneaky Tier-1 asset on the cheap.

Or do it when the market is on the way up in the hope it continues to get hotter, knowing you have support from your investors to pursue growth.

While buy low, sell high seems to be the obvious pick, especially knowing only companies with solid balance sheets can really play in that market, thinning out the competition, that sentiment overlay makes corporate decisions less simple than you’d think.

Gold M&A, for instance, is heating up as prices climb to record levels, while big miners seem to be willing to fork out almost anything for copper right now.

Lithium deals, however, are coming at the lower end of the market and today’s announced plan for Pilbara Minerals (ASX:PLS) to acquire Brazil’s Latin Resources (ASX:LRS) is a case in point.

Will we see more?

The PLS move has been met by mixed reactions from the market. $8.2bn capped Pilbara has seen its shares fall 4.21% in morning trade.

Latin, meanwhile, is up a tidy 52.8%, pushing its market cap beyond $500 million.

The deal comes in at a 32% premium to LRS’ 30-day VWAP, with both its board and biggest shareholder backing the deal. Its Salinas mine is slated to become the second major operation developed in Brazil’s Minas Gerais State’s Lithium Valley region after Sigma Lithium’s Grota Do Cirilo.

Canadian-listed Sigma, which has remained cashflow positive since opened Grota last year, is trading at around C$1.35bn.

PLS will boost its mineral resources by 20% with the deal, adding Salinas to its world class Pilgangoora mine in WA, where an expansion to 1Mtpa of spodumene concentrate is due to wrap up in September next year and studies on doubling that again to ~2Mtpa are in train.

Salinas’ development would add around 30% to its steady state production rate over the P1000 expansion, with PLS highlighting it as a potential top-10 hard rock lithium producer outside Africa and comes after PLS remained on the sidelines of M&A activity involving Canada’s Patriot Battery Metals (ASX:PMT) and WA’s Azure Minerals, with MD Dale Henderson regularly referring to corporate expansion as a distant fourth growth pillar behind expansion and exploration at Pilgangoora and downstream processing.

Premium on lithium recovery

While the premium appears hefty, the deal value of around 20c per share on PLS’ Wednesday closing price (it’s an all share scheme of arrangement which will see LRS holders own 6.4% of the merged entity) is less than half LRS’ all time high of 42c in August last year, a time when Brazil was emerging as the next frontier in Western lithium production.

Salinas placed a US$253m cost on developing the first stage of the project in a PEA last year, but has since grown the resource by 60% to 77.7Mt at 1.24% Li2O. 85% of that resource is in the measured and indicated category, the vast bulk of that in the Colina deposit.

Speaking to analysts after the deal was announced, Pilbara MD Dale Henderson referred to the proposed $560 million transaction as “counter-cyclical”, saying PLS would only bring tonnes to market, in line with its expansion plans at Pilgangoora, in line with market conditions.

Despite the push into a new jurisdiction, chief development officer John Stanning – a former Macquarie banker seemingly brought on board to nail down an acquisition for PLS early last year – said the company had been cognizant of challenges ASX companies had faced moving into new markets.

“We have focused deeply on this question because we acknowledge there haven’t always been success stories with offshore acquisitions by Australian companies,” he said.

“We’re comfortable with the quality of the project, but importantly we’re not acquiring an operating project here. We’re acquiring a project that is still in the DFS phase, so it actually allows our engineering and studies team to work jointly to design the project bringing all our learnings on board.”

Henderson thinks Brazil will become a significant lithium producing jurisdiction as it is in iron ore and specialty metals like niobium. While China dominates processing for lithium raw materials at the moment, he said Salinas would be well-placed to service a growing ex-China market he expects to emerge.

RBC’s Kaan Peker had expected the negative reaction to the deal, seeing ‘limited operational synergies’. First production from Latin’s assets is due in 2026, but sits halfway across the world from Pilbara’s WA base.

“PLS has previously indicated that acquisitions have been a low priority, with priority given to organic growth and maximising value from Pilgangoora. However, PLS had previously indicated that it was looking to diversify its revenue stream from Pilgangoora, while leveraging its core competency in hard rock lithium and maintain focus on Tier 1 jurisdictions, which is aligned with the announced transaction,” he said of the deal rationale.

While the deal did not contain a cash component, Latin boss Chris Gale said the deal was a win for shareholders if they believed in the long term future of the lithium thematic.

“What we’re doing is swapping out very good, undervalued paper in Latin Resources, into excellent undervalued paper with Pilbara and I think if our shareholders had a look over the last year and over the last two or three months most lithium companies have really suffered as a result of the downturn in lithium sentiment,” he said.

“I am more than happy and personally being one of the largest shareholders to accept Pilbara paper in lieu of cash at this time.”

Iron ore cooked

Singapore iron ore prices have meanwhile fallen for a third session in a row, down 2.14% today to US$93.60 as of 2.45pm AEST.

The trigger, among other things, were some pretty terrifying words from Baowu, the world’s biggest steelmaker.

Despite having a hand in three of the largest new iron ore projects to be approved in recent years – Mineral Resources’ (ASX:MIN) Onslow Iron and Rio Tinto’s (ASX:RIO) Western Range in WA’s Pilbara as well as the Simandou project in Guinea, West Africa – according to Bloomberg its boss told staff on a call yesterday the steel market in China was looking at a crisis scarier than the downturns seen in 2008 and 2015.

“The fall in steel mill margins in China further into negative territory, likely due to weak downstream steel demand, helps explain the recent downtrend in iron ore prices,” Commbank analyst Vivek Dhar said.

“China’s largest steelmaker, China Baowu Steel Group, noted that China’s steel sector now faces a crisis more acute than the downturns of 2008 and 2015. It’s hard to compare 2024 directly to 2008 and 2015 given how much the steel supply chain and end‑use sectors have changed.

“However, what is clear over the last year is that average steel mill margins have been more negative than any other 12‑month period prior since at least November 2016. It’s possible that this statement is true for an even longer period, but our steel margin data only goes back to November 2015.”

Analysts are now getting more bearish Chinese stimulus will solve an unfolding crisis in the country’s property sector, typically the growth engine for the steel market and its raw material segments in iron ore and metallurgical coal.

For many weeks now I have been warning that the ‘carnage’ in Chinese steel markets, taking rebar prices to 9yr lows, would send iron ore prices smashing through $100, down to $90, and then $85 by year end.

The world’s largest steel producer, Baowu Steel, added a huge weight to… pic.twitter.com/e6qaiPQBES

— Robert Rennie (@Robert__Rennie) August 14, 2024

Dhar said it’s hard to gauge how far iron ore prices, which have been sitting at a floor of US$80-100/t in recent years, have to fall.

“We think iron ore prices can drop to as low as ~$US90/t given how negative steel mill margins have become. A key difference to the fall in iron ore prices earlier this year (i.e. ~$US144/t on 3 January to ~$US98/t on 3 April), when steel mill margins were just as negative, is that seaborne supply is now at risk of exiting as prices move below $US100/t,” he said.

“This would typically mean a slower price drop, but our concern is that the speed that iron ore prices can fall will likely be driven by the surprising deterioration in China’s near‑term steel demand.”

After a hefty drop yesterday BHP (ASX:BHP) fell to a new 12 month low, but capped its losses at a touch over 1% having already tumbled yesterday amid the announcement of a strike at its Escondida copper mine in Chile.

Rio Tinto (ASX:RIO) (also a minority owner at Escondida) was harder hit, falling by over 3.7%. Met coal players like Whitehaven Coal (ASX:WHC) and Stanmore Coal (ASX:SMR) also tanked.

Materials fell 1.26% for the day, though there were a few mid-tier standouts.

M&A targets Latin (up 50%) and Predictive Discovery (ASX:PDI), which saw Perseus Mining (ASX:PRU) interlope yesterday via a $68 million splurge as a near 14% shareholder, was nearly 18% higher.

Mining services supplier NRW Holdings (ASX:NWH) continued a strong reporting season for the sector after Seven Group Holdings’ (ASX:SVW) results yesterday, with revenue up 9.2% to $2.9bn, EBITDA 15.9% higher at $334.8m and NPAT 18.6% up to $123.8m. EBITA was 17.4% higher at $195.1m.

On the record results, NRW lifted its final franked dividend to 9c per share, taking its total FY24 payout up 11.1% YoY to 15.5c. FY25 revenue and EBITA are expected to be around $3.1bn and $205-215m respectively.