Monsters of Rock: M&A whispers see Arcadium rise above the lithium pack

Things have been a bit dire for lithium miners in the past year or so, with a number of projects placed on pause to help avoid big cash outlays and share prices trending down.

We captured the sensitivity of lithium investors to bad news right now in yesterday’s MOR after a report that Ganfeng was looking to shop $271 million of Pilbara Minerals (ASX:PLS) shares.

That dark cloud has continued to hang today, with PLS down another 3%.

But one lithium major is on the up, with dual OZ/New York listed Arcadium Lithium (ASX:LTM) up 2.7%.

That seems to be thanks to a report in The Australian’s Dataroom column that fingers it and Albemarle as possible takeover targets for Rio Tinto (ASX:RIO), which has a number of early-stage lithium projects but is said to be keen on the takeover of a big producer now that valuations have come down from their insane 2023 highs.

We can divulge the Arcadium scuttlebutt is one we’ve been told around the traps. More smoke, no fire as of yet.

Notably, Arcadium is one of the few producers to have rolled out direct lithium extraction at its El Fenix site on Argentina’s Hombre Muerto Salar.

Rio is testing a form of its own DLE technology at the Rincon brine project, where a US$335 million pilot project with a 3000tpa LCE capacity is set to be completed this year.

It also looks to have regained support from the Serbian Government for the 58,000tpa Jadar mine in Serbia this year, though pitched community protests over the site make that far less than a certainty.

Buying existing production could help Rio short-circuit its entry into a sector the mining behemoth remains keen on long-term.

And unlike other producers, Arcadium does come with some baked in production growth.

Driving in neutral

Arcadium has been trying to get out there in recent weeks, placing itself in front of investors to convince them it can deliver on expansion plans which have been dialled back in the face of the lithium price crisis.

Having already moved the short-life Mt Cattlin mine in WA to non-core status (closing in 2025), it told investors at a strategy day last month the company thinks it will lift its production capacity from 75,000tpa today to 170,000tpa LCE by 2028.

That’s down from 250,000tpa in 2027, the target pitched ahead of last year’s merger between America’s Livent and Australia’s Allkem.

Aside from weaker pricing, Goldman Sachs analysts Hugo Nicolaci, Paul Young and Isaac Brooke said in a note this week that ‘Wave 1′ expansion projects would now cost LTM US$1bn more than previously advised, with US$1.6bn still to spend or US$2.3bn on a 100% asset ownership basis.

That sits US$500m above GS’ previous estimates, with the total cost of its expansion projects on a 100% basis, which include the Sal de Vida brine and El Fenix and Olaroz expansions, all in Argentina, coming to US$3.6bn.

Along with the Sal de Vida and Fenix stage 2 expansions, GS’ team, which has a neutral rating on LTM, thinks it will spent US$4-5bn on a pre-tax and 100% basis on growth projects by the end of 2029, US$1.4bn higher than previously forecast. GS has now excluded a Fenix 3 expansion from its base case along with Cauchari and a second stage at ‘Galaxy’, which is the former James Bay hard rock project in Quebec, Canada.

At $5.35 a share, GS’ price target still contains significant upside to LTM’s current trading price. But they warned LTM could test its debt covenants if current lithium pricing persists longer term.

It means Arcadium could be in a net debt position for longer than previously forecast, Nicolaci Et. Al. said.

“We note elevated capex now extends beyond the end of the decade into the early 2030s (excl. Fenix 3 development) and is equivalent to ~20-40% of current EV pa on average on our estimates (well above peers, from ~25-30% on deferrals),” they wrote. “As a result, we see FCF remaining negative until CY30E, with an increasingly prolonged return to net cash.”

The broader materials sector struggled today, falling 1.18% with iron ore futures in the red. Energy stocks bucked the trend, lifting 1.84% on fears Israel could launch an attack on Iranian oil supplies.