Allkem potentially on Rio Tinto’s radar

Allkem operates in the lithium space – a key requirement for electric vehicle batteries.

With BHP’s $9.6bn buyout of OZ Minerals finalised earlier this month, some in the market are questioning what next when it comes to major miners embarking on mergers and acquisitions.

One target that could be on Rio Tinto’s radar is the lithium miner Allkem. Its market value is $7.2bn and the $164bn miner Rio could make a play, according to a source.

Attractive to Rio is the fact that it operates in the lithium space – Rio Tinto is known to have been keen to further invest in lithium for some time and there were sources suggesting last year it was looking at targets.

Also, it operates in South America, a jurisdiction that Rio is familiar with.

In 2021, Rio Tinto purchased the Rincon lithium project in Argentina for $825m, a large undeveloped lithium brine project located in the heart of the lithium triangle in the Salta Province of Argentina.

Allkem’s portfolio includes a lithium brine operation in Argentina, a hard-rock operation in Australia and a lithium hydroxide conversion facility in Japan.

In Argentina it has the Olaroz lithium facility in the north of the country, the Sal de Vida lithium mine, capable of producing 15,000 tonnes per annum of lithium concentrate, and the Cauchari mineral resource south of Olaroz.

Should Rio be eager to embark on an acquisition, the argument is now would be the time to act. The price of spodumene, the mineral source from which lithium is extracted, has halved from its peak on weaker China demand as it works through its inventory.

This was after the price of lithium, used to make batteries in electric vehicles, rocketed almost 250 per cent over a year to hit about $US494 ($788) a tonne at the start of October.

Analysts at UBS last week trimmed their forecasts for the price of the commodity by 10 to 30 per cent over 2023 and 2024, reducing earnings forecasts by 10 to 40 per cent.

UBS has also reduced its lithium demand forecasts by 5 to 15 per cent in the short term and now see the market more closely balanced.

But long term, UBS increases its price expectations by about 20 per cent with a deficit of lithium expected later in the decade.

In its recent quarterly update, Allkem said group revenue for the quarter was $US315m and the group gross operating cash margin was about $US269m. At March 31, group net cash was $US557.9m, up $US25.9m from December.