Spencer Pffft
No room for thefainthearted in lithium’s year of action
Tim Spencer noticed a different moodin the air over the past couple of weeks as he resumed efforts to sell WesternAustralian lithium after a six-month hiatus.
“It feels more focused and more determined,” said Spencer of therevived talks he held this week with potential customers for the lithium hiscompany, Essential Metals, plans to produce.
“When you are dealing with some of the large Asian-basedplayers, the Chinese, Japanese and Koreans, they are often slow-ishorganisations, but the feeling I’m getting is they understand they need to movequicker.
“The conversations so far are, ‘We are prepared to act quicklyas part of your process’. Which is encouraging.”
This week’s $US10.6 billion($15.7 billion) merger of ASX listed Allkem and New York listed Livent was not the only factor lighting a fire under Essential Metals’ revived offtake talks. In the six months since they last met, Spencer’s counterparties had watched Essential and local lithium peer Liontown attract takeover bids, neither of which has been consummated.
US giant Albemarle has approved more than $US1.25 billion of new lithium processing infrastructure in WA and prices for lithium have cooled to levels that are still very high, but no longer at the stratospheric levels that make mergers and acquisitions dangerous.
Throw in a massive US subsidy schemethat makes Australian lithium more attractive to American battery manufacturers,and 2023 is looking like the year when the long-hyped potential of the locallithium sector turned into action.
“I think the enthusiasm of 2022 has now dissipated but thefundamentals are still shining through and people are looking at 2023 as a bitof a window of opportunity if they want to get involved in upstream supply,”says Spencer.
It is barely two years since Allkemwas created through the merger of two ASX-listed lithium pioneers, Galaxy Resources and Orocobre. Allkem boss Martin Perez de Solay revealed that ever since that Galaxy merger was completed, talks with Livent began on the potential for another, larger deal.
“We’ve been hovering over the landing pad for quite some time,you know, and we found that we are at a situation in which now it works andlet’s try to land the transaction,” he told AFR Weekend.
“If we didn’t do it within this period of time, it [the twocompanies’ trajectories] was going to diverge again.”
Australia doesn’t have a massive role in the merger of Allkemand Livent; while Allkem mines hard rock lithium in WA, it’s a deal that bringstogether two companies whose Argentinian lithium assets are walking distanceapart.
More significantly, the merger is about vertical integration,with Allkem’s heavy focus on the upstream resource set to complement Livent’sheavy focus on downstream processing infrastructure.
AustralianSuper has benefitted morethan most from the evolution of Orocobre to become Allkem and soon, a newlynamed company once the merger with Livent is completed. AustralianSuper boughta big chunk of Orocobre at less than $3 a share during the battery mineralsbust of 2020.
Allkem shares were above $15 onFriday, and AustralianSuper reckons there could be more gains ahead.
The merger “is a smart transactionfrom an equity markets perspective, company perspective and it brings smartindustrial logic to the sector,” said Luke Smith, who has overseen most ofAustralianSuper’s mining investments. The industry fund “sees strong synergiesin combining assets up and down the supply chains operating in complimentarycountries across the natural resources sector”.
He added that growth and consolidationin the sector will attract more investors.
Smith’s comments echo the viewarticulated by Livent boss Paul Graves in The Australian FinancialReview earlier this week: “Livent was not going to buy Galaxy, andLivent was not going to buy Orocobre. But put the two together and add the factthat we invested in Nemaska in Canada, when those pieces all start to line up,it fitted together much, much better and much more intelligently,” he said.
So is there someone higher up thefoodchain who wouldn’t bother buying Livent, and wouldn’t bother with Allkem,but might be inspired to make a move if the two were combined?
Rio Tinto moved into theArgentinian lithium scene 18 months ago and is keen to grow its lithium business, although it would prefer to do so at a time when asset prices are lower. There would be an element of buying back the farm if Rio did move on Allkem and Livent; Rio sold its Argentinian boraxbusiness to Orocobre in August 2012 and it continues to sit within Allkem.
The extreme highs and lows of thelithium cycle has driven large turnover of the local sector in the eight yearssince the first lithium boom took off. While names like Galaxy, Orocobreand Kidman Resources have enjoyed happy endings thanks to M&A, others like Altura Resources and Alita Resources went to the wall during the hard times.
A new crop is emerging in their place;names like Core Lithium, Ron Mitchell’s Global Lithium and Mr Spencer’s company Essential Metals.
Essential looked set to join the listof acquired lithium miners when Tianqi and IGO lobbed a friendly $136 milliontakeover bid earlier this year. The deal was days away from winning approval from Essential shareholders when Chris Ellison’s Mineral Resources bought 19.9 per cent of Essential, pushing its shares way above the 50¢ offer price and in effect killing the deal.
That’s why there was a six-monthhiatus in offtake talks between Essential and prospective customers; the talkswere paused while the takeover bid was on foot. “There is a dearth ofmid-tiers,” said Mr Spencer.
Global Lithium’s Mr Mitchell also hasMinRes on his register, and says the merger of Allkem and Livent will be the“biggest deal in the history of the lithium industry”.
It comes at a time when big M&Aseems to be back on the mining industry’s agenda with Glencore moving on Teckand Newmont close to acquiring Australian gold miner Newcrest. “The M&Aactivity at the moment is unprecedented,” said Mr Mitchell.
He does not expect the trend to stoponce Livent’s Mr Graves has control of a fully merged Allkem. “He is veryaggressive and he’s going to be doing things once he gets control of thismerger and he really likes hard rock [lithium]. He wants to expand into thatspace,” Mr Mitchell said.
“They’re a giant now with having acombined market cap of over $US10 billion, they could do some serious, seriousdamage on the M&A front once they get that merger up and going.
“Watch this space I think.”
Mr Spencer also reckons the action isjust starting: “In football parlance, we have only just completed the preseasonand the real games are starting,” he said. “It’s very early, this is amulti-decade thing and the market whilst it is much bigger than it was it stillhas a lot of growth to go.”
