Why Rio Tinto’s $9.9bn Arcadium Lithium buy is a steal

Rio Tinto has agreed a deal to buy Arcadium Lithium for $US5.85 a share. Picture: iStock

Rio Tinto’s agreement to buy Arcadium Lithium for $US5.85 (about $8.70) per share, in a transaction valuing the target at $9.92bn, is still a bargain for the mining giant, according to some experts, despite the price being almost double the target’s share price value.

Rio announced the agreed purchase at the close of market in Australia on Wednesday.

Advisers for both Arcadium Lithium and Rio Tinto have been hard at work pulling together the transaction in recent days.

Arcadium Lithium was trading at $4.18 before DataRoom reported speculation on October 3 of a transaction looming involving Rio Tinto with either Arcadium Lithium or Albemarle.

Shares in Arcadium Lithium gained 10 per cent in the US following, and before reports surfaced of talks between Arcadium and Rio Tinto at the weekend, which Rio Tinto confirmed on the Monday.

Working for Arcadium is investment bank UBS while former Goldman Sachs banker Gordon Dyal is also offering assistance.

Rio Tinto is working with Goldman Sachs and JPMorgan.

It is understood that both sides have had advisers involved in the transaction out of the United States as well as Australia.

Arcadium Lithium is listed in both the United States and Australia and is the result of a $US10bn merger between Australia’s Allkem and US-based Livent last year.

Rio Tinto said in a statement that the acquisition price is a 90 per cent premium to Arcadium’s closing price of $US3.08 per share on October 4, valuing Arcadium’s diluted share capital at about $US6.7bn ($9.92bn) including its outstanding convertible senior notes due in 2025.

Arcadium Lithium’s share price has fallen 63 per cent since January amid a global oversupply of lithium, a commodity used in batteries, but demand for lithium has been growing at double digit rates in recent years.

One market expert believes that a deal at the agreed cost to Rio Tinto is not substantially high risk for the $45bn company even if it did not eventuate as a well played investment because it is small in the overall scheme of things.

It also places it in a position where it is one of the only global miners with a substantial holding in lithium.

Arcadium Lithium shares closed at $5.91 on Wednesday with its market value at $6.33bn.

Given where the Arcadium Lithium share price closed at on Wednesday before the news, it was still at levels below it was in May.

Whether a deal proceeds (it’s now set to close mid next year) was always likely to be centred on Rio’s belief in the future of the lithium industry and the company’s overall asset quality, more so than price.

Despite Arcadium Lithium recently downgrading its expectations of future lithium production amid the slowdown in electric vehicle take up, Rio Tinto sees the demand outstripping future supply and it will take Rio Tinto’s Lithium Carbonate Equivalent production from 108,000 tonnes per annum to 373,000.

Sources believe the deal has all the hallmarks of a Rio Tinto transaction and makes much sense.

It’s counter-cyclical, and Arcadium Lithium operates in the jurisdictions where it already has its own operations and has brine operations which was more to Rio’s liking than hard rock assets.

These include Argentina, Australia and Canada, while it also operates in China, Japan, the UK and US.

Arcadium Lithium currently produces 75,000 tonnes of LCE, and with its expansion plans, that is set to double by the end of 2028, and Rio Tinto has the balance sheet strength to fund the expansion.