Ground Breakers: Why the Liontown takeover is good news for your lithium junior
After Albemarle’s new, improved takeover deal to buy Liontown, Canaccord is using a word lithium juniors will love to hear: ‘undervalued’.
They say, “a rising tide floats all boats” and that holds true in mining.
And M&A news around the sector should have lithium juniors feeling pretty bullish about their bargaining power as majors pile in to soak up resources in a race for electric vehicle supply chain supremacy.
The offer for all of Liontown Resources (ASX:LTR) and its Kathleen Valley mine for $3 per share from previously torched US suitor Albemarle, valuing the whole thing at $6.6 billion, will have ears pricked across the sector.
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And Canaccord Genuity reckons it shows the big names of the sector see long term prices far higher than the general market expects.
Albemarle, remember, thinks lithium demand grows fivefold by 2030. Projections from Rio Tinto (ASX:RIO), one of the few majors to really show an open mind when it comes to the new energy commodity, estimate that could be as high as seven-times.
“On our numbers, the proposal by ALB implies pricing of $US1900/t SC6 (versus “spot” of ~$US2900), and a premium to our CGe LT price of $US1500/t,” Canaccord’s Reg Spencer and William Jones said in a note.
It compares to a $3 unrisked NAV Canaccord holds on Liontown.
That risk essentially evaporates under Albemarle’s ownership of the Kathleen Valley mine, which could come in at a capex beyond the $895 million previously guided by the Tim Goyder chaired developer.
For the broader sector, Canaccord has one very enticing word to precipitate out of the deal – “undervalued”.
“Given that on average our lithium coverage is trading at an implied SC price of about $US1260/t SC6 v ALB bid of $US1900/t SC6, we believe it suggests that overall, lithium companies remain ‘undervalued’,” Canaccord said.
Liontown shares fell slightly this morning to $2.81, showing that unlike when they rejected the third (and first public) Albemarle bid of $2.50 a share in March, investors aren’t expecting to get a higher price from elsewhere.
Hot M&A: Peak or not?
It wasn’t the only deal to line up on our radar Monday.
Late in the day, Mineral Resources (ASX:MIN) confirmed it had been the not-so-secret bidder that won the right to buy out Alita Resources and snare the Bald Hill Lithium Mine near Kambalda in a process led by administrators McGrathNicol.
It came after the Foreign Investment Review Board stepped in back in July to stop the sale to a Nevada-based by Chinese linked company called Austroid, which had consumed its debt and tried to engineer a Deed of Company Arrangement.
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Despite sky high spodumene prices over the past year, product is currently being sold on at a loss to Yihe Cleantech Material Limited in Hong Kong, opening the prospect that the profits from the mine are being made outside Australia.
If MinRes can navigate a mazy run through the courts and halls of Parliament House to collect its bounty, it opens up a province-scale play for Chris Ellison’s business, centred on its ownership of processing plants at Mt Marion and Bald Hill.
Other deposits which could come into the fray would include the Buldania deposit Albemarle – a 50-50 JV partner with MinRes at the Wodgina mine in the Pilbara – will pick up from Liontown, a secondary find to its Kathleen Valley mine near Leinster.
Then there are Delta Lithium’s (ASX:DLI) Mt Ida deposit, the Pioneer Dome project Bill Beament’s MinRes backed green metals and mining services play Develop (ASX:DVP) is picking up in a takeover of Essential Metals’ (ASX:ESS) and Global Lithium’s (ASX:GL1) Manna deposit around 100 klicks east of Kalgoorlie.
MinRes is one of the top shareholders in all of DVP, DLI and GL1.
M&A like this is evidence of the consolidation of a nascent sector, but it could also be evidence of a peak – when premia get like this, buyer beware.
What it does do, Spencer and Jones say, is show where the big boys think lithium prices should be.
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Albemarle, which is spending well over $US1 billion to double the capacity of its Kemerton lithium hydroxide plant near Bunbury in WA’s South West, has thrown down the gauntlet to those who think lithium’s bull market was a fad.
“Lithium equities have drifted over the past couple of months on the back of lower pricing and uncertainty around global macro conditions and evidence of a slowing Chinese economy, but the bid provides a piece of information on what a large-scale lithium business might be thinking in terms of long-term prices,” Spencer and Jones.
“If the bid is successful this could have positive implications of other peer group stocks given the implied deal value of $6.6 billion.”
Just one more number for you: $986 million.
That’s the payout LTR chairman and major shareholder Tim Goyder stands to receive if Albemarle makes the bid a binding one.
His board has already stated it plans to endorse the scheme offer if that happens.
And what about those markets?
While it was running hot, hot, hot on Monday, the mining sector has caught a hangover, none more than one of Goyder’s other companies, Chalice Mining (ASX:CHN), which is down 20 per cent for the day at 1.30pm Tuesday (AEST) to $2.68.
Down around 42 per cent since the release of a scoping study last week on its Gonneville nickel-copper-PGE mine, the company’s market cap has since fallen from around $2 billion to a little over $1.1 billion.
It came as base metals prices stagnated in a water tread in response to Chinese economic stimulus policies.
Fortescue (ASX:FMG), BHP (ASX:BHP) and Rio (ASX:RIO) all fell into the red to lead the sector lower.
Pilbara Minerals (ASX:PLS), Yancoal (ASX:YAL) and Northern Star (ASX:NST) all fell hard as they went ex-div.
This content first appeared on stockhead.com.au
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