Analysis: Lithium buyers eye cheaper early-stage deals in Australia

Azure Minerals

23/08/2023 24:00

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      Interest grows in lithium projects not producing for years
out
    

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      Lithium mines, processing plants still need huge
investment
    

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      High valuations of listed producers deter deals involving
them
    

  
    By Melanie Burton and Scott Murdoch
       MELBOURNE, Aug 23 (Reuters) - Emerging Australian
lithium companies are witnessing a surge in buyouts as their
lower valuations and cash needs attract some of the world's top
producers of the battery material and other suitors who are
racing to secure supplies.
    Driven by receding prices of lithium and by major producer
Chile nationalising the industry earlier this year, companies
such as Albemarle Corp  ALB.N , the world's biggest lithium
producer, have been sniffing around for buys in Australia, which
makes the most lithium in the world and has more than 80
lithium-related companies listed on its main stock exchange.
    However, they are reluctant to pay up for listed producers
whose market valuations have sky-rocketed on the back of booming
prices, while offers have been rebuffed on the promise of
soaring demand to come from sales of electric vehicles and the
lithium-loaded batteries that power them.  
    That is forcing acquirers to shift their hunt to earlier
stage lithium developers, including some who are drilling to
quantify reserves, according to bankers, lawyers and mining
analysts. Many of these firms are less pricey and are hungry for
funds as they ramp up their activities.
    "It seems like the cheapest way to get lithium units is via
the drill bit," said analyst Kaan Peker of RBC in Sydney.
    "We'll see a lot of the exploration companies looking to
increase their resources and reserves, so that usually puts them
front of mind with the producers which are cashed up. So I think
there's going to be some opportunistic acquisitions."
    There is already evidence of frenzied deal activity
involving pre-producing companies. Develop Global  DVP.AX , a
base metals explorer backed by diversified miner Mineral
Resources  MIN.AX , last month proposed to acquire lithium
developer Essential Metals  ESS.AX  for A$152.6 million ($97.98
million). Essential Metals aims to ship ore by 2025.
    And Chile's SQM  SQMA.SN , the world's second-biggest
lithium producer, made an offer last month for Azure Minerals
 AZS.AX  after buying a 19.95% stake in it for A$20 million in
March.
    Azure, which is developing the Andover lithium project and
has ambitions to be in production by 2030, said last week it had
rebuffed the offer.
    Albemarle's $3.7 billion bid earlier in 2023 for Liontown
Resources  LTR.AX  before it starts producing the material next
year was also rejected.
    
   
    The deals mania comes as Australia is implementing a
critical minerals strategy that envisages significant
collaborations with investors and international partners in
order to become a renewables superpower.
    The country, which supplies around half of the world's
lithium, needs A$100 billion of strategic national interest
capital to attract A$200 billion-A$300 billion of private
investment to turn the country into a clean energy powerhouse,
according to Australian think-tank Climate Capital Forum.
    Consultancy WoodMackenzie expects global demand for EV
battery materials to grow five-fold by 2030.
    "Even though battery chemistry is evolving and impacting
certain metals, lithium is a mainstay and the demand story
remains robust. The battery metals landscape, and lithium in
particular, looks poised for further M&A activity,” said Gavi
Friedland, head of metals and mining at Goldman Sachs in
Australia & New Zealand. 
    
    TACTICAL BUYERS
    Consolidation of the industry is also being driven by
companies expanding activities across the value chain.
    Mineral Resources is deciding whether to build an Australian
lithium battery chemical plant, while Albemarle is expanding
production at its Kemerton hydroxide plant and SQM is also
building a lithium hydroxide plant.
    "Downstream facilities need product, so that continues to
drive M&A," said Guy Alexander, head of M&A at law firm Allens. 
 
    Buyers want to put their foot on supply early ahead of a
supply gap that will widen from around 2030, he said. 
    "I think there's still going to be more in this for the next
couple of years."
    Tactical buyers from major automobile producing nations
could also step up their M&A deals.
    Japan's Idemitsu  5019.T  raised its stake in developer
Delta Lithium  DLI.AX  to 15% in June. Delta plans to start
mining at its Mt Ida lithium project later this year.
    “The inbound investment trend will continue,” said Tony
Chong, a partner at law firm Squire Patton Boggs in Perth,
adding that he expected to see more Japanese interest in
Australian projects.
    China's critical minerals interest, however, could be
limited by national security concerns as Australia has been
vocal in prioritising investment from its allies and blocked the
acquisition of the Bald Hill lithium mine last month by a
China-linked firm. 
    Australian projects also face increasing competition for
suitors from Canadian ones, partly because of Canada's 
proximity to the U.S., the world's second-largest auto market. 
    Rio Tinto  RIO.L  is looking at "a number of possible
lithium opportunities" in a "pretty hot market" but any
purchases require discipline, CEO Jakob Stausholm said earlier
this month.
    The world's second-biggest miner would not mind a lithium
asset in Canada, Stausholm said.
    And, Albemarle this month took a 5% stake in Patriot Metals,
whose Corvette project in Quebec is not expected to be in
production until the end of the decade.
    But the Australians are not too worried.
    "I guess Canada as a region,...is probably not as quick as
Australia in terms of approvals and development timelines," 
Dale Henderson, CEO of independent lithium miner Pilbara
Minerals  PLS.AX  whose market capitalisation has zoomed to
A$14.5 billion now from around A$40 million in early 2020, told
Reuters last month. 
    "I also see moves afoot to try to accelerate that. It will
be interesting to see how that (industry) develops."
($1 = 1.5574 Australian dollars)

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Lithium valuations stay hot    https://tmsnrt.rs/3DVEshg
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 (Reporting by Melanie Burton; Editing by Veronica Brown and
Muralikumar Anantharaman)
 ((melanie.burton@thomsonreuters.com Twitter: @MelanieMetals;
+613 9286 1421; Reuters Messaging:
melanie.burton.thomsonreuters.com@reuters.net))