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Arcadium Lithium (ASX:LTM) looks set to fall after approving a near $10 billion bid from Rio Tinto (ASX:RIO) that will instantly make the iron ore and copper monster one of the world’s largest lithium producers.
Rio Tinto has reinforced its bullish view in the long term outlook for lithium, seeing a more than 10% compound annual growth rate in lithium demand until 2040, despite spot prices across a range of lithium products falling over 80% since late 2022.
“With spot lithium prices down more than 80% versus peak prices, this counter-cyclical acquisition comes at a time with substantial long-term market and portfolio upside, underpinned by an appealing market structure and established jurisdictions,” Rio said.
And Rio’s CEO Jakob Stausholm was quick to counteract commentary about the quality of Arcadium’s portfolio, formed from the merger of America’s Livent and Australia’s Allkem (itself a merger between Orocobre and Galaxy Resources), uttering the magic words ‘Tier 1″.
“Arcadium Lithium is an outstanding business today and we will bring our scale, development capabilities and financial strength to realise the full potential of its Tier 1 portfolio. This is a counter-cyclical expansion aligned with our disciplined capital allocation framework, increasing our exposure to a high-growth, attractive market at the right point in the cycle,” he said yesterday.
It’s Rio’s first major M&A deal in several years outside of assets in which it already holds a stake.
There’s been good reason to remain cautious. The Anglo-Australian’s company scale deals in the 2000s mining boom were a disaster, with its US$38bn acquisition of Alcan in 2007 followed by US$27bn in emasculating writedowns.
The US$3.7bn acquisition in 2011 of Riversdale Resources was even worse, given its Mozambican coal deposits saw their value slashed to less than zero, sold for just US$50m and saw now completed investigations into Rio’s investor communications run by various financial regulators.
But this time, Rio is confident the deal is a well-timed counter-cyclical move, with Stausholm saying the miner’s robust balance sheet and the need to avoid diluting existing shareholders made cash a better option than scrip.
The US$6.7bn, US$5.85 a share offer represents a 39% premium to Arcadium’s volume weighted average price since forming in January this year, but is far below the US$10.6bn valuation ($15.7m) ascribed when the Allkem-Livent merger was announced in a hot lithium market in May 2023.
Arcadium shares were up 30.7% in New York to US$5.54 at 10.30am American Eastern Time on Wednesday.
As in Happy Gilmore, both miners have been forced to play the ball where it lies.
Arcadium has one of the most expansive growth profiles in lithium, with the stated potential to lift its output from 75,000tpa today to 170,000tpa on a lithium carbonate equivalent basis in 2028.
But that’s been trimmed from the 250,000tpa floated at the merger, with work to develop assets outside the flagship Olaroz, El Fenix and (the under construction) Sal de Vida brine operations in Argentina slowed down, including the Galaxy spodumene project in Canada’s James Bay district.
That’s largely come with lithium prices tumbling, but there are other factors.
Arcadium’s existing expansion projects have seen cost estimates blowout, with Goldman Sachs analysts saying in a scenario where lithium surpluses persist the company could test its debt covenants.
“We didn’t like cutting our capital and slowing down our growth,” Arcadium boss Paul Graves said.
“On looking ahead, we recognise that the best way to realise the vision from our merger is with Rio Tinto, and it’s in this new home that we will start accelerating our growth and bring this vision to reality. Together, we can unlock significant value and long term success in the rapidly evolving lithium market.”
Those expansion plans now appear to be back on the table, with Arcadium’s projected growth capex to make up just 5% of Rio’s group capex of up to US$10bn across 2025-2026. A drop in the ocean, so to speak.
“What is really key for me … is how can we get the project schedule back to the accelerated path at the time of the merger of Allkem and Livent because lately, of course, Arcadium have had to preserve cash and therefore not accelerate it as fast,” Stausholm said on a conference call.
For Rio, which is planning to deliver the first product from a pilot direct lithium extraction operation in Argentina called Rincon, it delivers immediate production and growth assets, especially important given community opposition to its Jadar lithium project in Serbia.
But could the acceleration of Arcadium’s development assets, potentially bringing 50,000tpa LCE online two years early, put more hurdles in the way for the return of lithium deficits?
Arcadium’s Graves insisted the market would be in short supply in five years even if Rio, which plans to close the deal in mid-2025, ramps up faster.
“The market is going to be undersupplied by the end of the decade, particularly when prices stay where they are today, and the cost curve we believe is only going to get steeper,” he said.
“It’s incredibly difficult to bring low cost resources on from scratch. We’re fortunate that we’re not doing it from scratch.
“We’re up and running in three different resources, and very soon, four different resources. So the advantage we have to bring on low cost, while the rest of the industry is going to have to bring on high cost, we feel very confident there’s plenty of scope for more rapid and larger expansion of low cost resources like ours.”
LTM recently announced the closure in 2025 of its Mt Cattlin spodumene mine in WA, generally considered a smaller and lower quality operation compared to its Australian peers, one of a number of supply cuts announced in response to price falls this year.
Not everyone is happy. Sydney fundies Blackwattle Investment Partners have doubled down on their criticism of the deal, with portfolio manager Tim Riordan and deputy portfolio manager Michael Teran calling for Arcadium’s shareholders to go against the board and hold out for an offer of US$6.80/sh or US$8bn.
“We are disappointed that the Arcadium Board and Management has not received the appropriate value for shareholders with this offer, and in our opinion should consider walking from what we believe is an opportunistic offer,” they said in a letter yesterday.
“This offer is just a few weeks after an Investor Day outlining management’s confidence in the significant, value accretive growth opportunity for Arcadium.
“Importantly, the Investor Day also outlined the balance sheet capacity to fund the expansions, and further levers including asset sales, OEM funding and capex deferral.”
The scheme vote will need 75% of shareholders voting to approve the deal.
Talking to The West Australian, Perth based Arcadium chairman Peter Coleman, the former boss of oil and gas major Woodside, accused Blackwattle of trying to talk up the miner’s price after prosecuting its case for a higher price in the media in recent days.