Analysis: Rio's Arcadium buy may pave the way for more lithium purchases

Vulcan Energy Resources

15/10/2024 09:00

MELBOURNE, Oct 15 (Reuters) - 
    Rio Tinto's  RIO.AX  purchase of lithium miner Arcadium
 ALTM.N  may herald more to come as cash-rich investors seek
entry to the energy transition sector, where valuations have
been battered by tumbling prices for the metal. 
  
        Rio Tinto CEO Jakob Stausholm told Reuters last week
that a weak market had yielded an opportunity to pick up top
quality assets at the right price, triggering its $6.7 billion
buy.
    While lithium prices are not expected to bounce back soon,
demand should outstrip supply by 2030. Given that, Rio is
unlikely to be alone in seeing the appeal of mergers with
existing companies, according to bankers, executives, and
analysts.
        An increase in mergers would demonstrate that companies
are backing a long-term view of lithium's increasing value and
recognising a need to increase size through acquisitions to play
a growing role in the energy transition. 
  
        The potential buyers are "probably those that have ...
strong cash flow from existing operations saying 'Actually we
think lithium is where we want to be in five to ten years,'"
said Adam Martin, executive director for energy at financial
advisor E&P in Melbourne.
  
        The most likely companies are currently outside the
lithium space and realize building projects from scratch will be
"pretty hard to replicate," he said.
  
    Demand is expected to more than double by the end of the
decade to around 2.7 million metric tons of lithium carbonate
equivalent (LCE), from around 1.2 million tons this year,
according to broker Canaccord.
    Lithium prices are down about 80% from their record at the
end of 2022 above $70 per kg, dragging producer valuations
lower. However, prices will likely double to $19 per kg in the
long-term, from about $11 a kg currently, Arcadium said last
week, citing the median of estimates of analysts it consulted.
    Opportunities exist for companies that can buy now and wait
it out, prove up the economics and then make good, said Sherif
Andrawes, head of global natural resources for tax advisor BDO.
    Rio's Arcadium purchase and Pilbara Minerals' $377 million
deal in August for Latin Resources  LRS.AX  are the "two obvious
examples and I would not be surprised at all to see more," he
said.
    Still, there are factors that may shrink the number of
buyers for lithium acquisitions. Rio and Pilbara's purchases
remove them from contention, while an oversupplied carbonate
market and developments of alternative battery technologies have
thinned out the buyer pool, said two bankers that work on energy
and mining mergers. 
    
    SMALLER COMPANIES 
    Smaller-scale lithium developers close to production are
under pressure from falling cash stockpiles and difficulty
raising capital, BDO said in June.
    Consolidation will be needed to give companies more options,
said a board member at a junior lithium company who asked not to
be identified so he could speak freely.
    The recent low prices have been tough for the industry and
made it difficult for them to raise money, said an executive at
a lithium developer who also asked not to be identified, adding
that gold miners are seeking stakes in producers as they have
cash holdings and want to diversify operations.
    But even larger developers like Canada's Patriot Battery
Metals  PMET.TO  could attract buyers because its
Shaakichiuwaanaan project could be scaled up and for its
strategic location in Quebec, Macquarie Bank said in a note in
August.
    Patriot did not respond to a request for comment.
    Brazil's Sigma Lithium  SGML.V  is also possibly for sale
after last year considering buyout proposals from several
companies though CEO Ana Cabral-Gardner said in April she would
not sell her company amid depressed lithium prices.
        Albemarle  ALB.N , with its global operations, also
became more attractive to possible buyers following Rio's
purchase, analysts at Jefferies said in an Oct. 9 note.
Albemarle said it would not comment on rumours or speculation. 
    Chevron  CVX.N , Saudi Aramco  2223.SE  and other oil
companies have also shown an interest in the sector amid the
growing popularity of direct lithium extraction technologies. 
    Australian iron ore miner Fortescue  FMG.AX  has said it is
actively looking for lithium deposits, including through equity
stakes in developers in Canada and Portugal, a source who has
been in discussions with the company said. Fortescue declined to
comment on potential acquisitions. 
        Chile's SQM  SQMA.SN  is looking for early-stage
projects,
    analysts say. It has partnered in the last couple of years
with Wesfarmers  WES.AX  and Hancock, as well as taking stakes
in developers in Sweden and Namibia. SQM declined to comment. 
    
        In August, it announced the creation of SQM
International Lithium to expand outside of Chile, aiming to
boost production by at least 100,000 metric tons a year by the
end of the decade.          

        
    ($1 = 1.4843 Australian dollars)
    ($1 = 1.3779 Canadian dollars)

 (Reporting by Melanie Burton, Additional reporting by Daina
Beth Solomon in Santiago, Divya Rajagopal in Toronto and Ernest
Scheyder in Houston; editing by Veronica Brown and Christian
Schmollinger)
 ((melanie.burton@thomsonreuters.com Twitter: @MelanieMetals;
+613 9286 1421; Reuters Messaging:
melanie.burton.thomsonreuters.com@reuters.net))