Rio Tinto gets a taste for lithium but its billions may not be enough

Do big Australian companies possess bad body odour or offensive breath for foreign corporates? Rio Tinto has just lobbed the third attempt by a large Australian company to acquire an offshore target. All three have experienced a lukewarm reception or were largely unwanted.

Rio’s $US4 billion ($5.9 billion) overture towards US-based lithium producer Arcadium is still in the talks stage, but has already been slammed by one of Arcadium’s significant shareholders – Blackwattle Investment Partners.

Rio Tinto CEO Jakob Stausholm was in Miami this week.Credit: Jamila Toderas

And Rio’s lithium play comes on the heels of the Murdoch-backed digital real estate portal REA Group being sent packing by its UK equivalent, Rightmove, which rejected the $8.3 billion put on the table.

REA’s initial bid was branded opportunistic but after undertaking a bidding competition with itself, the final offer was considerably more generous and enticing for shareholders. Unfortunately, the board of Rightmove didn’t see it that way, and REA didn’t have the stomach (or Murdoch’s blessing) to overpay for a strategic spearhead into the UK market.

And who could forget the treatment meted out to BHP earlier this year, when its $75 billion attempt to acquire fellow miner Anglo was roundly dismissed by the UK-based miner’s board. By the time BHP put forward its third- and twice-sweetened offer, its own shareholders were starting to worry at the generosity of the offer.

BHP ultimately walked away.

It doesn’t help would-be acquirers that the UK (where Arcadium also has a listing) possesses quite onerous takeover rules that require the bidder to “put up or shut up”. This forces them to make a documented offer or formally walk away after 28 days of negotiation and gives the target company a disproportionate leverage compared with other takeover regimes, including Australia.

As prey goes, both Anglo and Arcadium are large targets. Anglo had been underperforming in earnings and its share price reflected it, while some of its shareholders had become disillusioned with management. However, what Anglo did possess was large and valuable tier-one copper assets that BHP needed to further propel its plan to grow the relative size of the metal in its portfolio of assets.

Copper is crucial to the ongoing green energy transition, as is lithium which is used extensively to make batteries for electric vehicles. It is more ubiquitous and its price has been under the hammer for about 18 months.

While there are hopes that the price has stabilised, there has been a wave of mine closures around the world this year. This gives Rio a lot more leverage to execute an acquisition despite offering a price that some would say is opportunistic at best.

The emergence of a vocal shareholder warning of a backlash if any takeover premium is too skinny heralds that Rio won’t have it all its own way.

“Arcadium Lithium’s share price has fallen 63 per cent this year on weak lithium markets and reached an all-time low last month,” said Blackwattle’s portfolio managers, Tim Riordan and Michael Teran. Any offer would have to be at a “significant premium” to realise the company’s growth potential.

Clearly, Rio boss Jakob Stausholm wants to bulk up the company’s relatively small investment in lithium by buying an existing company with mines and processing assets for a cheaper price than developing it from scratch.

Not only does the deal make sense for Rio, but even if it paid well over $6 billion, the mining giant would hardly be betting the whole farm. In the rarefied world of the world’s giant miners like BHP and Rio, a price tag of $6 billion doesn’t really move the needle very far.

Rio Tinto is expected to start producing lithium from its Rincon project in Argentina before the end of 2024.

Over the past few years, under the auspices of a more thoughtful Stausholm, Rio has been in a fix-it mode, and the play for Arcadium represents the first significant sign of it moving into a more aggressive phase.

And there is nothing to stop Stausholm from attempting to pick off additional lithium assets while the metal’s price is in distressed territory. However, it will be a very big bet from him on lithium prices roaring back to recovery over the long term.

With the takeover dance between Rio and Arcadium now officially kicking off, a fresh round of lithium games can begin. And Rio will be hoping to get one over BHP in the takeover stakes.

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