Summary
- Rio may need to pay over $5 bln, investors and analysts say
- Bottom-of-the-cycle play is good timing for Rio Tinto
- U.S.-listed shares of Arcadium up 40% on Monday
(Reuters) – Rio Tinto is in talks to buy lithium producer Arcadium with the global miner looking to pounce following a slump in prices for the ultralight metal used to make electric-vehicle batteries.
A deal would turbo charge Rio’s rise to become one of the largest producers of lithium behind Albemarle and SQM. Reuters exclusively reported on Friday that the companies had been holding talks and that Arcadium could be valued at $4 billion to $6 billion or higher.
The approach was confirmed by both parties on Monday in separate statements that did not offer financial details and declined further comment. It follows a sharp slump in lithium prices that had dragged Arcadium’s shares down more than 50% since January.
Arcadium’s extensive lithium reserves across four continents, as well as its focus on lithium alone, rather than fertilizer or other products like some of its rivals, could prove an attractive prize for Rio. From Arcadium’s perspective, Rio’s large balance sheet would allow those lithium assets to be developed in time to meet an expected surge in global demand next decade.
It was unclear whether any deal could be structured to primarily include cash, stock, or a mixture of both, but a stock transaction could entice Arcadium shareholders anxious about recent market weakness.
Australian shares of Arcadium jumped 46% on Monday, and sparked a jump in other Australian-listed lithium companies. Rio Tinto’s shares fell 2%.
U.S.-listed shares of Arcadium surged 35% in Monday morning trading.
Lithium demand is forecast to surge later this decade from growth in lithium-ion batteries.
By buying Arcadium, Rio would gain access to lithium mines, processing facilities and deposits in Argentina, Australia, Canada and the United States to fuel decades of growth, as well as a customer base that includes Tesla, Ford, BMW, and General Motors.
The combined group could account for some 10% of global lithium chemicals supply by 2030, analysts at Canaccord said.
Rio’s own Rincon project in Argentina is due to start producing later this year, while its huge Jadar project in Serbia could take at least two years to secure permits to go ahead.
HEFTY PREMIUM EXPECTED
Andy Forster, a portfolio manager with Argo Investments, which holds shares in both companies, sounded a cautious note around high valuations for Arcadium, noting it had many growth projects but not the balance sheet to build them.
“The economics of long-term pricing for lithium is not what it has been,” he said.
Analysts at TD Cowen said they would expect deal discussions would need to begin at $5 per share. That would imply a premium of at least 60% on Arcadium’s close of $3.08 on Oct. 4, when Reuters reported talks were in motion.
However, Blackwattle Investment Partners in a letter to Arcadium over the weekend said any offers in the reported range would “significantly undervalue” the lithium company.
“In our opinion, a sale price for (Arcadium) should be closer to $8 billion, and (Arcadium) should be willing to walk away from an opportunistic offer,” Blackwattle said.
Arcadium was well placed to weather the lithium price storm, Blackwattle’s Michael Teran said, since it has delayed development of some Argentinian and Canadian projects.
“This is one of our biggest worries that someone like Rio comes and takes it right at the bottom and you miss out on all of the upside when stocks have already taken a beating,” Teran said.
($1 = 1.4717 Australian dollars)
Reporting by Melanie Burton in Melbourne, Himanshi Akhand and Surbhi Misra in Bengaluru, Ernest Scheyder in Houston, and Clara Denina in London; Editing by Cynthia Osterman, Diane Craft, Sonali Paul and David Evans
