Analysts are not convinced a competing bid for Liontown Resources will eventuate

Billionaire Gina Rinehart, executive chair of Hancock Prospecting.

Analysts are not convinced Hancock Prospecting will make a competing bid for lithium producer Liontown Resources, which raises questions about the end game as the Gina Rinehart-owner miner edges towards a potential blocking stake.

Late on Friday last week Hancock revealed - as expected - it was the buyer of a second large block of shares traded on Wednesday, worth about $110m, after picking up $132m in Liontown stock earlier in the week.

The new buy takes Hancock to a 12.36 per cent stake in Liontown, which currently has a $6.6bn bid on the table from US battery chemicals giant Albemarle, which is progressing through due diligence.

The increased stake, and possible future buys, could complicate Albemarle’s plans, given it now cannot easily sail past the 90 per cent ownership threshold at which compulsory acquisition of outstanding shares kicks in.

Any shareholder vote on the Albemarle bid will need a 75 per cent acceptance of shares voted also, and while Hancock’s share is short of that on an absolute basis, given that various shareholder parcels including any owned by Albemarle itself will get struck out of the voting process, there is a suggestion that around 15 per cent constitutes a blocking stake.

Macquarie analysts believe the likelihood of a competing bid greater than Albemarle’s $3 per share offer is low, and also said that Liontown’s Kathleen Valley project update on Friday actually increased the likelihood that Albemarle’s offer will graduate to a binding offer.

While Liontown did flag increased capital and operating costs for the project, both up 6 per cent on Macquarie’s expectations, its analysts were comfortable that this was within Albemarle’s comfort zone.

Albemarle, Macquarie said, had flagged that costs, the resource and commercial agreements would be the key sticking points as it went through due diligence.

“We view the risk around the resource at Kathleen Valley to be low,’’ Macquarie’s analysts say.

“We note that Kathleen Valley is a straightforward spodumene pegmatite deposit which is analogous to other spodumene pegmatite deposits in Western Australia that have successfully produced spodumene concentrate such as Pilgangoora, Wodgina, and Greenbushes.

“(On capital costs) In our view, this was the major risk for Albemarle’s offer moving from

non-binding to binding.

“After today’s update, which outlined capital costs of $951m (6 per cent higher than $895m announced in January 2023), we think that this risk has been mitigated.’’

Citi analysts said on Friday the capex and opex increases were “not unexpected and we see it as unlikely to impact the $3 per share Albemarle bid’’.

“Albemarle due diligence has just over one week to go and we’d expect an update following.’’

While analysts were fairly comfortable with the Kathleen Valley update, Hancock sought to frame it as evidence that the company faced execution risks - one of its key arguments that it, rather than Albemarle, would be the preferred project partner given its expertise in bringing large projects to operational stage in the Australian context.

“Whilst Hancock continues to see Liontown’s Kathleen Valley project as a significant lithium asset, Liontown’s update to the ASX ... reinforces Hancock’s previous observations that the project faces significant execution, operational ramp-up and market risks,’’ the Australian miner said in a statement late on Friday.

“Liontown confirmed a further $56m capital cost increase to $951m, and on a ‘real’ basis which ignores inflation.

“Factoring in inflation over time, the actual capital cost could be in excess of $1b. This follows Liontown’s prior cost increases, above the $473m estimate from its definitive feasibility study.’’

Hancock also cast doubts on the validity of the updated cost estimates, noting that “the productivity, design, quantity and schedule risks largely remain with Liontown’’.

“Hancock also considers that most cost pressures typically emerge in the second half of the construction of mining projects.

“Liontown’s revised operating cost estimate has increased by approximately 50 per cent from previous estimates. The actual numbers are some time away from being known.

“Only last month, Liontown stated that it was proceeding with a direct shipping ore (DSO) product to provide an early source of revenue from the project, describing the economics as compelling.

“Today (Friday), Liontown put DSO on hold indefinitely due to declining lithium prices.

“Liontown’s need to debt fund part of its capital costs, and the DSO revenue source that is on hold, has now increased to a minimum of $450m – which Liontown has indicated may need to be further increased.

“Ultimately, it is the Liontown shareholders that will have to meet the cost of this additional funding.’’

For its part, with due diligence expected to wrap up potentially as soon as this week, Albemarle is not saying much, beyond broad comments in a shareholder update over the weekend 1 which says the transaction was expected to “generate an internal rate of return significantly above Albemarle’s weighted average cost of capital’’.

If a binding bid is issued, Albemarle expects the transaction to close in the first half of 2024, following shareholder approval and relevant regulatory approvals including from the Foreign Investment Review Board.

There is also the prospect of Chris Ellison’s Mineral Resources joining the fray, as it did in the takeover battle for Warrego Energy earlier this year, where it eventually tipped a 19.9 per cent blocking stake into Hancock’s offer, getting it over the line.

MinRes has not made a move as yet, however it would make strategic sense to collaborate.

Hancock currently owns lithium assets near the Kathleen Valley project with its Mount Ida project co-owned with Delta Lithium - which in turn is chaired by Mr Ellison and 14 per cent owned by MinRes.

Meanwhile long term Liontown shareholders will be celebrating.

The company raised $7.9m at just 2c a share in early 2019 to progress the Kathleen Valley project with chairman Tim Goyder taking up $893,940 worth of new shares at the time.

Mr Goyder will clear just shy of $1bn should the $3 per share takeover go through, given he now owns just shy of 15 per cent of the company.

Liontown shares were trading half a per cent higher at $2.95 on Monday.