UBS defends Arcadium Lithium after Rio Tinto bid

Rio Tinto hopes to capitalise on soaring lithium demand. Picture: iStock

Arcadium Lithium is understood to be working with investment bank UBS after receiving a buyout proposal from Rio Tinto which is believed to value the target at more than $US4bn.

Sources had been pointing to Macquarie Capital, but this was not confirmed by the Australian investment bank, while Bank of America could also be involved.

It is understood the pair are still negotiating over price and that Rio is offering cash.

Arcadium Lithium’s Australian share price closed at $5.94 on Tuesday, down 15c or 2.5 per cent, after soaring by more than 40 per cent on Monday when Rio Tinto confirmed it had made an approach to buy the company, taking its market value to $6.5bn.

Rio closed 19c lower at $120.99 on Tuesday.

While there’s still a lack of clarity surrounding the likely price, the understanding is any offer made so far is well over a 30 per cent premium to Arcadium’s undisturbed share price.

Shares started to rally late last week after DataRoom reported speculation Rio Tinto was closing in on either Arcadium Lithium or Albemarle.

Rio Tinto confirmed reports at the weekend it was in talks to buy Arcadium, an Australian- and US-listed lithium miner.

Arcadium is the product of a $US10bn merger last year between Australia’s Allkem and the US-based Livent. UBS advised Allkem on the transaction.

Its share price has fallen 63 per cent since January amid a global oversupply of lithium, a commodity used in batteries.

This has prompted the group to scale back production forecasts, with electric vehicle demand lower than expected in Western markets.

News of the looming deal has caused stocks to rally across the sector, with Australia’s Liontown Resources up about 10 per cent in the past five days and industry giant Albemarle, which previously bid for Liontown, rallying in the US.

Rival groups may use the share price rise to raise equity, although some of the value gains were due to short sellers covering positions.

Despite share price gains, questions remain over whether institutional investors will double down on lithium stocks when discounted opportunities are available across the market.

Arcadium Lithium is chaired by former Woodside Petroleum boss Peter Coleman.

Chief executive Paul Graves will be among those who stand to gain the most from a buyout, with his employment contract stipulating he will receive about two years of remuneration on a change of control transaction — about $US9m.

His total annual pay last year was about $US5m, according to the company’s annual report.

Some investors are wary Arcadium may sell too cheaply. They include Blackwattle Investment Partners, which has written to the board over concerns about a sale at between $US4bn and $US6bn, indicating the sale price should be closer to $US8bn.

RBC analysts said they viewed the countercyclical offer as opportunistic.

They have lifted their price target to $6.10, or $US4.6bn, incorporating a takeover control premium. Arcadium was trading at $4.18 or $3.5bn (US$US3.3bn) on Friday.

The deal would increase Rio Tinto’s lithium exposure to 4 per cent of its portfolio.

Rio and Arcadium have operations in Argentina and Canada.

Aligning lithium brine technologies is likely to present operational synergies, RBC says.

In North America, Arcadium’s assets include James Bay, Nemaska (Whabouchi mine and Becancour plant) in Canada and lithium processing in the US (Bessemer).

Rio has its low-cost hydro-powered aluminium smelters and Sorel operation in Quebec, Canada and exploration joint ventures in Quebec’s James Bay region.

In Argentina, Arcadium has two operational brine assets (Olaroz and Hombre Muerto) and development assets in Sal de Vida and Cauchari, while Rio Tinto is developing Direct Lithium Extraction (DLE) technology, which it plans to modularise for use in Rincon.