Will Rio Tinto’s $9.9bn Arcadium deal fuel lithium buying frenzy?

The price of lithium, which is used for batteries, has fallen substantially in the past year. Picture: iStock

Rio Tinto’s $9.9bn Arcadium Lithium purchase may have offered some hope for other lithium producers looking for a buyer, but industry experts believe that they should not get too excited just yet.

They believe with world’s largest lithium producer Albemarle capital constrained and Mineral Resources also with a stretched balance sheet, it’s unlikely to happen for now.

But RBC analysts say because the lithium market remains small with few players, the likelihood of additional mergers and acquisitions could increase.

That’s certainly the view of some investors in lithium stocks, with their shares rallying on news that Rio Tinto was in talks to buy Arcadium Lithium.

But RBC adds in the longer term, there is risk that Rio’s expansion into lithium could keep markets well supplied, lowering long-term price estimates, although this could take a number of years to play out and would depend on the rate of demand growth.

Rio Tinto paid $US5.85 per share for Arcadium Lithium, which it said was a 90 per cent premium to its share price on October 4.

But based on where its share price closed on October 3 at $US2.80, after DataRoom reported Rio could be in talks to buy the business, the premium was in fact closer to 109 per cent.

While some believe Rio Tinto has over paid, others say the share price rally on the takeover speculation still didn’t take Arcadium Lithium to where it was trading in May, after the stock has fallen about 63 per cent so far this year on the back of the collapse in the lithium price amid an oversupplied market.

The price is still $US1bn below the $US8bn company replacement value, according to analysts at Citi.

Analysts at RBC say that two stalled projects could be bought forward by two years, although market observers believe with Liontown Resources just starting to move into production mode, the market oversupply is unlikely to be rectified in the short term.

Much of whether the deal is a win for Rio will depend on the take-up of electric vehicles, which run on batteries, in the medium to long term.

Rio’s share price closed more than 1 per cent, up $1.63 to $119.87 on the ASX on Thursday after announcing the deal.