Australian shares closed within a whisker of a record high as banks rallied and Rio Tinto’s bid for Arcadium sent lithium stocks soaring.

The S&P/ASX 200 rose 55.4 points, or 0.7 per cent, to 8205.4, just 7 points shy from the record closing high of 8212.2 set in September in a thinned trading session due to the Labour Day holiday. The index snapped a three-week winning streak on Friday.

Of the index’s 11 sectors, seven ended in the green with tech and financials gaining the most. National Australia Bank powered up 1.9 per cent to $37.12, Westpac advanced 2.2 per cent to $30.78 and the Commonwealth Bank added 1.5 per cent to $134.77.

Lithium rockets

But Arcadium Lithium was the index’s stand-out, soaring 46 per cent to $6.09 after Rio Tinto confirmed it was in takeover discussions with the dual-listed miner. That was its biggest one-day gain since the company was created in January through the merger of Allkem and US company Livent.

While the bid sent Rio Tinto down 2.5 per cent to $121.17 on the day, it lifted sentiment for the battered lithium sector where traders have built a record number of short positions as prices of the alkali metal plummeted. The move higher in stocks, however, forced speculators to cover their shorts.

As a result, Liontown Resources rocketed more than 18 per cent to 88¢, Sayona Mining jumped 13 per cent to 3.5¢, Core Lithium climbed 8.7 per cent to 12.5¢, and Lake Resources and Evergreen advanced more than 7 per cent each.

“There’s elevated short interest across the entire sector, so it is understandable to get a sharp reaction when you get corporate activity like we did with Rio,” Sam Berridge, portfolio manager of Perennial’s Natural Resources Trust. Yet, he cautioned against hopes for a sustainable recovery of lithium prices.

“Just because Rio decides to make a bid for a company, it does not make lithium prices about to bounce.”

Energy shares edged higher in a choppy session, as oil prices consolidated hefty gains amid mounting worries that a broader war in the Middle East would hit supply. Brent crude slipped 0.5 per cent to $US77.67 a barrel and West Texas Intermediate fell 0.4 per cent to $US74.12.

Beach Energy added 0.8 per cent to $1.28 and Woodside firmed 0.2 per cent to $26.68.

Stocks in focus

In other commodities, iron ore giant BHP rose 0.6 per cent to $44.86 and Fortescue leapt 3 per cent to $20.35, buoyed by a rally in iron ore prices on speculation China’s top economic planner will unveil more stimulus measures at a press briefing on Tuesday morning.

Beijing unleashed a string of support measures – including interest-rate cuts and targeted support for the property sector – late last month, driving sharp gains in global metals prices.

The November futures contract traded in Singapore climbed 1.7 per cent and reclaimed the $US110 mark.

In corporate news, West African Resources was the biggest laggard, slumping nearly 20 per cent to $1.34 amid concern about its mining permits in Burkina Faso.

The sell-off comes despite the company affirming guidance and reiterating that the Burkina Faso government was supportive of its gold mining operations.