Rio Tinto boss Jakob Stausholm has taken a sharp detour towards lithium

With all the focus on copper, the global miner is pivoting towards a metal which few of its rivals are taking seriously. This is why.

Rio Tinto chief executive Jakob Stausholm. Picture: Lyndon Mechielsen

With the world’s biggest miners in a race for anything resembling copper not already pegged down, Rio Tinto boss Jakob Stausholm has taken a sharp detour towards lithium – a metal which many doubt will ever be a top-tier commodity.

There are two things the Rio Tinto boss is signalling through his opportunistic $US4bn ($5.9bn)-plus approach for strained lithium play Arcadium.

The first is he thinks the longer-term outlook for lithium prices are going to be much higher than the stockmarket is anticipating. For Stausholm this is a multi-decade play.

The other is Rio Tinto has got its mergers and acquisitions mojo back again.

By making an approach on Arcadium, the sector’s own top consolidator, the Rio boss has put a much needed rocket under lithium miners, which have been seriously battling while prices were in the doldrums from an oversupplied market and little prospect of recovery in the near term.

Rio Tinto is eyeing Arcadium’s brine-based lithium mines in Argentina. Picture: AFP

Sagging sales for EVs outside China and last week’s confirmation from authorities there that the economy could be in deeper trouble have only added to the bleak prospects for lithium.

Remember, the Australian and US-listed Arcadium itself is a product of multiple big-bang lithium mergers. But so much was tied up on the development of its lithium prospects that couldn’t save its share price which were down more than 60 per cent before takeover talks emerged.

It was only this year Australia’s Allkem merged with South American-focused Livent in a deal at the time valued at $9.7bn. That came only two years after Allkem was formed by the merger of Australian lithium stars Galaxy Resources and Orocobre.

Rio has made its approach as Arcadium feels the double hit of collapsed lithium prices and the fact that the lithium major will be in a heavy capex phase over the next four years as its Argentinian projects and other manufacturing sites across North America come on-stream.

That’s the opportunistic side. But a company like Rio is planning in long-term cycles and it still believes lithium will be a metal of the future. It has previously told investors the reason why it has persisted with lithium is the market fundamentals for battery grade lithium carbonate are strong.

It has previously tipped demand forecast to grow at more than 25 per cent annually from the 2030s, although the market will be oversupplied until the second half of this decade. But it is only interested in options that have strategic value.

“It doesn’t really matter what the lithium price is for us in the short term,” Stausholm told a recent investor briefing. “We really have to think about what’s going to be the average price over the next 10, 15, 20 years.

“The world will need lithium because you do need lithium for at least high-performance batteries. And the world needs more batteries. So that’s, kind of, the fundamentals are going our way.”

Arcadium’s lithium brine-based operations of Salar del Hombre Muerto produces lithium carbonate at a facility on site. This complements Rio’s Rincon project, which is also in Argentina’s lithium triangle where it had been planning to build a battery grade lithium carbonate plant.

And Rio is defining itself against its rival big miners by being prepared to go further downstream in its chosen markets.

Rio Tinto is confident about the long term outlook for battery demand.

This involves taking integrated lithium production involving the complex processing to turn the raw materials into battery grade product ready to be sold directly to carmakers or South Korea’s, Japan’s and China’s battery giants.
Rio already produces aluminium around the world so it has some experience in manufacturing.

Indeed, Arcadium has a number of high-end manufacturing facilities under construction across the US, Argentina and also Canada, including the Bessemer City in North Carolina, which is the only lithium metal producer in the US.

Rio on Monday said the approach to Arcadium was non-binding and there was no certainty that any transaction would be agreed to or would proceed.

Still, the external M&A is a sign that Stausholm thinks his miner has put the myriad of operational problems of the past behind him.

His Australian iron ore business is running well and making gains on marginal costs. And his Mongolian copper business is ramping up nicely after finally sorting out the messy ownership structure. Importantly, Stausholm’s management team has been stable, a telling sign for the momentum the miner has found.

It’s no surprise that Rio is still haunted by its Alcan aluminium mega-deal nearly two decades ago, which still ranks among one of the worst M&A deals of this century given the massive collapse in value as China started flooding the market with cheap metal.

Arcadium is a relatively small deal for a miner the size of Rio and there will still be a large degree of caution inside Rio about the transaction. It is likely that a round of price discovery will follow but Rio will hold the line on price.

Possible rival bidders will be few and far between as names like BHP have declared an intention to sit out of lithium. Glencore too has little interest in the metal.

Presenting Rio’s half-year figures in July Stausholm said the numbers have drawn a line under a decade where Rio Tinto didn’t grow.

The miner is now executing projects better and was seeing good organic growth in its business. So too it had been encouraged by the buyout of minorities and a smaller deal like Rincon three years ago.

The Arcadium approach is showing Rio has got its confidence back and is ready to do deal-making again.

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Originally published as Rio Tinto boss Jakob Stausholm has taken a sharp detour towards lithium