Rio Tinto PLC RIO-N is buying lithium producer Arcadium Lithium PLC ALTM-N in a big bet on the electric-vehicle battery metal in the midst of a vicious bear market.
The Anglo-Australian major is paying US$5.85 a share for U.S.-based Arcadium, a premium of 90 per cent to Friday’s close, in an all-cash transaction worth US$6.7-billion. The boards of both companies are in favour of the deal.
Lithium prices have crashed in recent years owing to China flooding the market and a slowdown in electric-vehicle sales.
Arcadium, which both mines and processes lithium, has operations in Argentina, Australia, China, Japan, Britain and the United States. In Canada it owns 50 per cent of the Nemaska Lithium project. The Quebec government owns the other half. Arcadium also holds the Galaxy lithium project in northern Quebec, which is located about 100 kilometres from Nemaska.
Rio Tinto is one of the world’s biggest mining companies with iron ore, aluminum and copper mines in its portfolio. Up until now it has had a limited presence in the lithium market. It has plans to develop a major lithium mine in Serbia, but development of the US$2.4-billion project is years behind schedule in large part because of significant resistance from the general public owing to environmental concerns. Rio Tinto also owns the Rincon lithium brine project in Argentina, which it plans to put into production at the end of the year.
Lithium carbonate is trading about 85 per cent lower than its peak just over two years ago. Amid the bear market, the share prices of lithium producers have been devastated, including Arcadium. The company recently slashed its capital expenditure and growth plans.
Arcadium chief executive officer Paul Graves in a conference call on Wednesday said that the Rio Tinto bid offers cash certainty for shareholders at a “very attractive price,” compared with the risks the company faces.
Arcadium was formed through the merger of Australia’s Allkem Ltd. and Philadelphia-based Livent Corp. earlier this year.
Rio is betting that lithium prices will recover over the long term and that global supply will be in a deficit by the end of the decade.
In a conference call with analysts on Wednesday, Rio CEO Jakob Stausholm fielded a query about whether the company might jeopardize its dividend by paying cash, and whether it would have made more sense to pay for the deal in stock. Rio Tinto is expected to be carrying US$12-billon net debt as a result of this deal, which would be its highest level in eight years.
Mr. Stausholm replied that Rio had not considered paying in stock, in part because he believes the lithium market is at the low end of the price cycle. Paying cash puts Rio Tinto in the best position to benefit from a bull market, he said. But he also conceded that despite the company’s bullishness over the lithium market, nobody really knows where the commodity is going.
“We never know where we are on the cycle,” he said.
The proposed acquisition of Arcadium is the biggest deal for Rio since its 2008 acquisition of Canadian aluminum producer Alcan Inc. for US$38.1-billion. In 2022, Rio acquired the 49 per cent of Montreal-based copper miner Turquoise Hill Resources Ltd. it didn’t already own in a $4.2-billion transaction.
Mr. Stausholm in an interview said that he would have loved to have paid a lower premium for Arcadium, but that “it takes two to tango,” and Arcadium’s management and board pushed for a higher valuation.
Christopher LaFemina, an analyst with Jefferies, in a note to clients said that the vast majority of Arcadium’s value lies in its pipeline of projects, which is expected to almost double its annual lithium capacity by the end of 2028.
This year has seen a resurgence in deal-making among the world’s biggest mining companies. BHP Group Ltd. BHP-N earlier in the year launched an unsolicited US$49.1-billion proposal for AngloAmerican PLC but walked away after being rebuffed.
Editor’s note: This article has been updated to correct Rio Tinto's purchase price per share for Arcadium.