Rio Tinto’s hidden lithium messages to Albanese government

The last slide of Rio Tinto chief executive Jakob Stausholm’s presentation on the $10bn Arcadium Lithium takeover had a hidden message for Energy Minister Chris Bowen and Resources Minister Madeleine King.

There was also a subtle dig at BHP chief executive Mike Henry, Bowen and King for the government-backed investment of $230m mainly in convertible notes to support hard rock lithium mining and treatment operations of Liontown Resources. Rio believes brine is a much lower cost source of lithium.

Two years ago, Henry explained that one of the reasons BHP was not investing in lithium was the fact that in 2022 it was difficult to find a project that had a substantial cost advantage over the rest of the market.

Stausholm’s final slide showed the situation would change and there was now a major “cost curve” ahead in lithium, which would be very similar to the “cost curve” in copper mining.

At the bottom of the “cost curve” – ie the lowest cost producers – were those producing lithium from brine led by Rio’s takeover of hard rock lithium producers that use conventional mining. The Stausholm slide did not name companies and indicated that some hard rock lithium producers would be low cost and some lithium via brine producers would be high cost, but overall there was a clear pattern.

Rio Tinto CEO Jakob Stausholm. Picture: John Feder/The Australian

Given the projected rise in lithium demand, there is scope for hard rock miners like the Australian government’s Liontown to do well.

But in the good times it will be the low-cost producers that make the most money and when the price is depressed, low-cost producers will handle the tough times much better.

It is remarkable that the ASX has funded two of the major global brine processing technologies.

Stausholm makes it very clear that a key reason why Rio is prepared to pay $10bn for Arcadium is that they are buying a company with excellent technology.

Arguably, Arcadium has the most experience operating the high efficiency form of lithium brine production system, A-DLE.

The company has been using the technology in Argentina since 1996 and this project is next door to a lithium asset Rio purchased for $800m in 2022.

Although Arcadium is an ASX listed company, its technology was developed in the US.

By contrast, Vulcan used the risk appetite of Australian ASX investors to fund its technology development. It is now completing a $2bn loan raising from European trade funding banks including the Australia’s Export Finance bank to apply the Vulcan technology to extract lithium from brine waters in Germany.

It will use geothermal heat in its lithium extraction process to produce a carbon free lithium, as well as supplying base load renewable power to local communities.

Brine with lithium is common around the world, but there are relatively few technologies available to extract the lithium. And it is remarkable that Australia should fund one of the technologies and have substantial equity in the second.

Among the groups most familiar with suitable brine deposits are oil companies. Groups like Exxon, Chevron and the Norwegian state oil company are entering the field but will need to buy access to the technology from Arcadium, Vulcan or one of the other groups with suitable technology.

Auto making is one of Europe’s biggest industries, and they do not want to be dependent on non-European sources for lithium and batteries. Vulcan has supply contracts with major European motor companies’ battery operations.

Robotic arms manufactured by Kuka operate on a Volkswagen Passat saloon chassis on the automated welding production line inside the VW factory in Emden, Germany. Picture: Krisztian Bocsi/Bloomberg

Geographical diversification is going to be important in the lithium industry because supply chains are localising.

China has more than three quarters of the lithium battery market, and both the US and Europe are increasing battery production to lower dependence on China.

Australia also has suitable brine deposits in the Cooper Basin, and we may eventually produce lithium from brine.

The Rio bid timing is important. Because of the fluctuating demand and limited supply, the price of lithium has fluctuated wildly. Over the last four years we have seen lithium rise from $US8,000 ($1202) a tonne to $US80,000 and then back to $US10,000.

Stausholm and his Rio board believe there is a great future for low-cost lithium producers. While the company is bidding around twice the old market price for Arcadium, it is buying an established proven operator with excellent resources at the time when the price of lithium is low. Not surprisingly, there have been rumbles from some institutional shareholders that Rio is getting the company too cheaply.

Billionaire Gina Rinehart in WA.

Vulcan is still Australian owned with key shareholder Gina Rinehart owning about 7.5 per cent of the capital, but she is also an investor in Liontown so has a stake in both forms of lithium production.