Rio Tinto has made a takeover approach to Arcadium Lithium

Rio Tinto has made a takeover approach to Arcadium Lithium which, if successful, would deliver immediate mining and downstream conversion operations globally.

A lithium ion battery factory in China.

Rio Tinto has made atakeover approach to Arcadium Lithium which, if successful, would deliver it immediate production and a company which is looking to double sales over the next four years.

The global miner confirmed on Monday that it had made a takeover approach to Arcadium, after The Australian’s DataRoom column broke the news that the deal was in the offing late last week.

Arcadium shares piled on 45.7 per cent in value on confirmation of the approach on Monday, closing up $1.91 at $6.09, with a market capitalisation of $3.3bn.

The stock is still well off its 12-month highs of $11.57, achieved this time last year, and has traded as low as $3.30 over the period.

Rio has significant lithium ambitions, currently on the back of its proposed Jadar underground project in Serbia and its Rincon brine project in Argentina, which is nearing production.

An acquisition would deliver Rio 10 operating sites across nine countries including Argentina, which is home to the company’s Salar Del Hombre Muerto brine operations and other development assets.

As well as mining operations, Arcadium has downstream conversion operations producing lithium hydroxide and lithium chloride.

Rio Tinto Jakob Stausholm has been bullish on lithium while earlier this year commenting that he expected the price of the battery metals commodity to remain volatile.

In contrast BHP has decided not to enter the lithium market, with chief executive Mike Henry saying there were no projects globally which fit its investment profile, and that the company believed that the value in lithium was on the processing side, where BHP did not have expertise.

Arcadium was formed in January as a result of the $US10bn merger of US-listed Livent and Australian-listed Allkem.

Arcadium’s Mt Cattlin lithium mine in WA which is being placed on care and maintenance.

The company recently had its first strategy day as a combined entity and chief executive Paul Graves said it had a target to double sales volumes by 2028, and reach EBITDA of $US1.3bn.

“Our vertically integrated operating network, broad range of high-performance lithium products, and deep technical know-how allow us to maximise the value of each unit of lithium we deliver to customers,’’ Mr Graves said at the time.

“This is complemented by a disciplined commercial strategy that provides greater visibility and profitability throughout market cycles and allows us to confidently invest to meet the growing long-term demand needs of our customers.’’

Arcadium is expecting to grow its lithium carbonate and lithium hydroxide volumes by 25 per cent in both 2024 and 2025 driven by expansion projects at its Fenix and Olaroz projects in Argentina, which are completed and have no further capital requirements.

Building on that, the company is embarking on a “two-wave” expansion strategy.

“The first wave of four existing projects at various stages of advancement is expected to be fully completed, in stages, by 2028 and more than double sales volumes from today,’’ the company said.

“The second wave of projects are at the development and planning stage and this wave offers the company the opportunity to increase production capacity beyond 2028 by a further 125,000 metric tons (lithium carbonate equivalent) to 295,000 metric tons total.

“The size and quality of Arcadium lithium’s portfolio of resources means it is not constrained in its ability to continue to grow organically.’’

Arcadium said it had a strong balance sheet with peak net leverage not expected to exceed 2.1 times, and its outlook was bolstered by low-cost operations and multi-year customer agreements.

Savings from the merger which created the company were also continuing to flow through.

“Beyond expected cost savings of up to $US80m in 2024, the company now expects to deliver close to its initial run-rate savings target of $US125m by the end of 2025, roughly two years ahead of plan,’’ Arcadium said.

“These savings are driven primarily by organisational restructuring, operational and supply chain synergies and a reduction in third-party and other services across the two legacy companies.

“The company also believes the total longer-term savings opportunity to be greater than $US125m.’’

Arcadium is expecting to generate $US1.4bn in revenue this financial year and EBITDA of $US525m.

Macquarie last week rated Arcadium an outperform with a target price of $5.30 against its then price of $4.05.

“Management’s prudent move to simplify portfolio, slow expansion speed, conserving cash and maintaining margins highlight its growth optionality,’’ Macquarie analysts said.

“Additional portfolio optimisation could further streamline the business.’’

Macquarie analysts also said they would not be surprised if Arcadium sold its Mt Cattlin mine in Western Australia, which it announced in September would be put into care and maintenance.

“We don’t believe underground mining at Mt Cattlin is a strategic fit for the company and believe an asset divestment is a possible outcome with improved lithium market conditions,’’ Macquarie said.

“Interestingly, Arcadium also indicated potential divestment of non-core brine and hard-rock tenements.’’

Arcadium also ruled out an equity raising in the short term Macquarie said, which “was a positive with the company indicating flexibility in project capex spend in a prolonged weak lithium market’’.

Citi analysts said while a bid for Arcadium would be opportunitstic given lithium prices were at three year lows, “it’s challenging to see a catalyst for the stock to re-rate in the short term (aside from an acquisition)”, given the company’s operational and balance sheet profile.

Citi noted that it would be cheaper to buy than build out Arcadium’s assets, with the replacement cost sitting at $US8bn.

Citi had a target price of $6.50 per share on the stock before Rio’s interest was confirmed on Monday.

Rio shares closed down 2 per cent on Monday at $121.17.

Originally published as Rio Tinto has made a takeover approach to Arcadium Lithium