Rio Tinto shareholders tipped to back $10bn lithium play

Shareholders of the mining major are expected to support the near-$10bn takeover of Arcadium Lithium as they bet on a buy, not build, approach.

Lithium is used in the battery-making process.

Rio Tinto shareholders are expected to back the near-$10bn takeover of Arcadium Lithium as they bet a buy, rather than build, approach is less risky amid the continuing slump in the price of the critical battery material.

Rio Tinto says the deal, which makes the mining giant one of the world’s biggest lithium producers, was a “risk worth taking” and a significant step in its long-term strategy to create a world-class business needed for the energy transition.

The view was backed by major brokerage houses, with Citi analysts saying shareholders are likely to support the deal with the “cheaper to buy versus build thesis” playing out.

“Without Rio, Arcadium shareholders would have likely had a bumpy ride,” said Citi. “Arcadium is expected to be a top five lithium producer globally by volume with an accelerated growth and downstream product strategy.” Citi says the merger is expected to bring $125m in synergies each year and expedite mine expansions.

CreditSights analysts says the acquisition is a better way for Rio to quickly gain exposure to lithium, rather than spending billions on greenfield projects in high-risk jurisdictions.

Rio’s plans to develop a lithium mine in Serbia has attracted huge environmental protests. “The Arcadium deal will allow Rio Tinto to not only add lithium assets but also quickly expand via brownfield investments,” CreditSights says.

People gather to block the highway in Belgrade as they protest against Rio Tinto's plan to open a lithium mine in the country.

“In contrast, we prefer Rio not spending billions on the Serbian lithium project given the ongoing environmental protests against it.” It added Arcadium represented a “bite-sized” acquisition for Rio.

“Rio has previously expressed an interest in increasing its exposure to green metals, such as copper and lithium, as it aligns with its strategy to diversify and capitalise on the growing demand for EV batteries,” CreditSights says.

“Unlike copper, which has rallied, the current downturn in lithium prices — from a peak of $85,000 per metric ton in late 2022 to about $10,000 per metric ton today — presents an opportune moment for Rio to buy at cyclic lows.”

Goldman Sachs says Rio brings financial strength — balance sheet and cost of capital benefits — to fund Arcadium’s growth pipeline. “They are comfortable that the vast majority of Arcadium’s projects will be competitively positioned,” Goldman Sachs says.

By 1pm AEST Rio shares rose 0.2 per cent to $118.43 on the ASX on Thursday while Arcadium soared almost 39 per cent to $8.20.

Rio’s $US6.7bn ($9.96bn) all-cash deal for $US5.85 per share represents a premium of 90 per cent to Arcadium’s closing price of $US3.08 per share on October 4.

Originally published as Rio Tinto shareholders tipped to back $10bn lithium play