Australia has consolidated its position in the ranks of major lithium players with the friendly cross-border merger between Allkem and New York-listed Livent. The move stands to create a $14.8bn lithium player with mines in Western Australia, Canada and Argentina, and processing plants in the UK, US, Japan and China.
The merger signals the rapid evolution of the lithium sector, which just several years ago was highly fragmented and played at the more speculative corner of the stock market. But as car markers scrambled to lock in lithium contracts to underpin battery manufacturing, the supply chain also professionalised, transforming players from explorers into producers with a global footprint.
BHP has so far stayed out of lithium, given the iron ore major plays a scale game, chasing vast mines over a single site that have a long life of operation.
Rio Tinto, which had briefly been linked to Allkem, has dipped its toe in the sector through the undeveloped Rincon lithium project in Argentina, but the miner is exploring moving up the production value chain.
Wesfarmers is spending more than $1bn building out its integrated lithium project with Chilean giant SQM.
ASX-listed Allkem is itself the product of merger, following the combination of Orocobre and Galaxy two years ago. Following that deal is when Allkem came on Livent’s radar, and the two companies had been talking about a combination since March last year.
The bulk of Allkem’s development operations are focused in Argentina, while the hard rock Mt Cattlin mine in Western Australian underpins sales.
Based on the deal terms, Allkem shareholders will emerge with 56 per cent of the yet to be named entity, although the primary listing will now be in New York.
Former Woodside chief executive Peter Coleman will chair the merged company, which will be the world’s third-biggest integrated lithium producer by output. Livent CEO Paul Graves will run the new company, while Allkem’s CEO Martin Solay will continue until the merger is finalised and then move to an advisory role.
Speaking to The Australian from New York, Graves says as lithium producers get scale, they need to get bigger to continue to reinvest and develop resources further. At the same time, auto industry customers are hungry for larger lithium players.
“They want us to be bigger,” Graves says. “We’re going to produce about 250,000 tonnes (of lithium) in a few years. That’s about GM’s annual purchasing. Then you’ve got Ford, you’ve got Volkswagen, you’ve got Tesla”.
“Everybody needs a big supplier, you can’t be there supplying 15,000 tonnes a year of product,” he says.
Suppliers also need to get more integrated, providing a range of process material as battery technology gets more sophisticated.
Graves says the global car industry is at different stages of maturity in how they are building out lithium supply chains from lithium supply to batteries.
“At the top of the list clearly is Tesla, it’s just more sophisticated than everyone else. Behind that you have a relatively small group of companies, GM, Ford, BMW and VW are getting there – who are building that supply chain.”
Other car makers are outsourcing the whole process, but are quickly learning that is not delivering the performance or supply certainty they need and will have to get involved in the process, he says.
He points out that all the producers that are locking in supply contracts never take delivery of a single kilo nor do their battery suppliers. Rather, most of the production ends up with cathode producers in Korea, Japan or China.
“These are complicated supply chains for them to build,” Graves says.
Allkem’s shares surged 15 per cent Thursday to $14.84. The all-share merger ratio represents a premium of 21 per cent on Allkem’s Wednesday closing price and an implied merger offer of $15.63 a share on pre-trading numbers.
AI is hot property
The way Greg Goodman sees it, the more intense the AI arms race between tech giants Amazon, Google and Microsoft becomes, the better it is for his bottom line.
Goodman, who was an early mover on the smart warehouse boom, has also been quietly spending up big in data centres. And like his warehouse play, it pays to be years ahead of the pack.
“Every time they talk about AI, we get excited,” Goodman tells The Australian. “The more that’s going into the cloud, the better. And it doesn’t seem to be slowing down anywhere in the world.”
Goodman believes tech giants over time will want to get more control over data centres – the high security facilities that house all the heavy duty computing needed to power the cloud. As new tech like generative AI demands more computing power, the buildings housing the black boxes are going to get bigger and more complicated.
And that’s where Goodman steps in. His development team finds the site, secures the approvals, builds the facility, gets the massive electricity requirements in place and then will
either sell the finished product or Goodman manages the facility itself. It can take as much as seven years to develop a site, which means the barriers to entry are high, requiring deep pockets.
Greg Goodman has more than $1.6bn worth of data centre construction currently underway in Japan and a pipeline of projects slated in other markets. The company’s overall development book is currently running at $7bn over the past year and a third of this is on building data centres.
This growth in demand opens the door for Goodman Group to create its own data centre fund down the track. The long-life nature of the facilities offers a blend of property and infrastructure-style returns. This means the returns won’t be as high as pure industrial properties, but they are defensive and inevitably offer a hedge against inflation. Some of the leases Goodman is entering into are between 20 to 25 years, making them ideal for income-focused investors.
“If you’re patient, and you get the right sites, it’s a very good long-term value proposition for Goodman and our partners,” he says.
Patience wins out
Goodman has spent years tilting his business away from being a low-margin, high-velocity warehouse developer into one that secures premium sites and builds all the necessary infrastructure and the systems needed for a smart warehouses. He builds and operates several mega warehouses around the world for e-commerce giant Amazon.
But the engine room for the company is now a funds platform, that is a mini-Macquarie Group that develops and operates warehouses and business parks jointly with large super funds or other big investors. The model allows Goodman to grow without having to put its own balance sheet at risk.
On Thursday Goodman hiked its guidance for the coming year to earnings per security growth to 15 per cent – previously the company had been targeting 13.5 per cent.
Goodman has now topped $80bn in assets under management it owns directly and across its jointly controlled funds. Already Goodman is the biggest listed property player on the ASX and at the current run rate the company is on track to easily pass the $100bn mark in three years.
The bulk of the warehouses are held in Australia with more than 40 per cent of the assets, while Japan, Hong Kong and China represent a third of assets and 13 per cent each in the US and Europe.
The long-term nature of leases allow Goodman to avoid the swings of interest rates cycles. It can also be more selective about when it sells warehouses.
Since the financial crisis Goodman has notoriously run his business with low levels of debt. Even when cash rates were rock bottom two years ago Goodman’s gearing (debt to assets) was just 6.8 per cent. Since then it has increased to 8.4 per cent, with 80 per cent of the debt hedged against higher interest rates.
Goodman’s US exposure is limited to the activity centres in New York and Los Angeles. And with interest rates moving much faster there he is yet to see any signs of a credit squeeze impacting his business, but emphasises Goodman operates in very specific markets. He’s got $1bn worth of building underway in Los Angeles and more coming from the New York region over the next year where he says growth is resilient.
“We feel confident to do that (in those cities) – but that’s not the case everywhere,” he says.
johnstone@theaustralian.com.au
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Lithium producers are struggling to keep up with demand from global car makers such as General Motors, Tesla and Volkswagen with the race on to switch to electric vehicles. And the pressure for miners to get bigger is only going to intensify.