Rio Tinto confirms takeover talks with Arcadium Lithium

Rio Tinto said the approach to buy Arcadium Lithium was non-binding.

Market experts are betting that Rio Tinto’s offer for Arcadium Lithium will likely be rebuffed before it returns at a later stage with a sweetened deal.

It comes as analysts at Barrenjoey have placed a valuation on its takeover target Arcadium Lithium of $5.3bn after the mining giant confirmed in a statement to the market on Monday it has made an approach to buy the business.

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

It comes after DataRoom first flagged the talk in the market on October 3 that Rio Tinto was shaping up to embark on a major transaction and could be looking at the Australian and New York dual-listed miner Arcadium Lithium.

The other possible target was Albemarle.

DataRoom reported at the weekend talks were afoot with Arcadium Lithium in a deal shaping up to be worth at least $US4bn ($5.9bn).

Shares on Monday soared 44 per cent on the ASX to $6, (market value $4.45bn) on the confirmation by the $47bn Rio Tinto, while other miners in the sector have also rallied, including New York listed Albemarle, up more than 8 per cent in New York.

Arcadium Lithium’s market value was about $US3bn in New York before reports of the looming deal.

Arcadium Lithium is the result of the $US10bn merger agreed last year between the US-listed Livent and the Australian listed Allkem.

Barrenjoey says the unsurprising move comes after Rio Tinto has spoken about its desire to build a lithium business with brine the preferred route.

Rio Tinto, being well funded, can accelerate production.
The much larger Albemarle has also been speculated as a target, but is less attractive for Rio Tinto, because it has some non-lithium assets, hard rock non-operating joint ventures and downstream China assets.

Analysts at Barrenjoey say the move is not surprising, as Rio Tinto has spoken about its desire to build a lithium business. Picture: AAP Image/Mick Tsikas

Arcadium Lithium’s share price is down 63 per cent since January, and Barrenjoey believes the target is worth $4.96 per share (equating to a market value of $5.3bn).

It’s expected Rio’s first offer will be rebuffed as opportunistic and it will have to lift the price, although there are no obvious interlopers.

However, Rio, known for carrying out extensive research before embarking on corporate activity, would be prepared for this.

Barrenjoey’s value estimates of Arcadium Lithium excludes the value for unapproved projects outside of James Bay in Canada, given its concern over its ability to fund the projects.

Additional resource development could add about $4 a share to the analysts’ net present value, and based on consensus net profit, a deal could be accretive up to 4 per cent based on concensus in 2027 post assumed synergies.

Arcadium Lithium is a global lithium chemicals producer with a diversified product offering spodumene, carbonate, hydroxide and lithium chemicals.

It has a presence in three major lithium geographies including the South American “lithium triangle”, Western Australia and Canada, and a globally significant lithium deposit base.

The merger of Allkem and Livent promised combined production capacity of 250,000 tonnes per annum of lithium carbonate equivalent (LCE) by the end of 2027.

But the rapid decline in lithium prices through 2023 forced Arcadium to re-evaluate its capital spending projections, future expansion timelines and production estimates to match market conditions, supply chain challenges, and local labour market capabilities and now says it forecasts capacity at 170,000 tonnes per annum LCE by 2028.

Barrenjoey’s $4.96 per share price is based on long-term spodumene and chemical prices of US$1,500 a tonne and US$18,000 a tonne respectively.

But analysts believe that demand for the commodity will remain strong, growing at double digit rates, despite coming off the boil from the giddy heights when China was stockpiling the commodity.

Meanwhile, Citi analysts say that Arcadium’s replacement cost is $US8bn.