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Rio Tinto should buy up Arcadium Lithium, the New York-listed lithium producer which acquired Australia’s Allkem in a mega-merger this year, instead of pursuing its own efforts to build out a battery metals business, Citi brokers say.

In a note to clients, the Wall Street investment bank’s analysts said buying Arcadium – which has a market capitalisation of $US3.96 billion ($5.86 billion) – “could be a more economical option than developing its own lithium assets”.

Shares in Arcadium have halved since January, tracking a steep decline in the price of lithium amid weak demand for electric vehicles and oversupply of the battery metal in the global market. The price of lithium carbonate has tumbled almost 90 per cent from its record in 2022, cutting into margins and making some projects unworkable.

The price collapse has hit ASX-listed lithium stocks hard in the past year, with major producers including Pilbara Minerals and Mineral Resources all down more than 20 per cent. West Australian lithium developer Liontown Resources was the worst performing stock on the ASX 200 in the past financial year.

An SQM plant in Chile. The company has struck a deal with the Chilean state-owned copper producer, likely creating more supply in the market and pushing prices down further. Bloomberg

Arcadium is the result of a $15 billion merger between North American giant Livent and ASX-listed Allkem, once known as Orocobre. The two companies shared similar upstream operations, including extracting raw materials such as brine, but Livent’s downstream footprint promised additional cash flow and earnings.Citi’s Paul McTaggart, in analysis shared with clients last week, said Arcadium could deliver Rio exposure to lithium at scale “in jurisdictions with which Rio is familiar plus exposure to [critical minerals] supply chains”.

The broker said a buyout bid for the dual-listed lithium producer could prove more cost-effective in the long run than developing the iron ore miner’s long-troubled Jadar project in Serbia, despite recent steps forward to get the project into production.

“The new president in Serbia and a perceived change in government attitude towards Jadar has made Rio hopeful of winning over renewed project backing given the previous Government had withdrawn its support,” Mr McTaggart wrote.

“Still, Rio has plenty of work to do here around community backing.”

According to modelling produced by the brokerage, acquiring Arcadium at a 30 per cent premium to its current trading value would achieve a 16.4 per cent internal rate of return for Rio – compared with Jadar’s forecast 12 per cent return.

Lithium prices were again lower late last week, after Chile’s state-owned copper producer, Codelco, confirmed its partnership with lithium producer SQM, marking its entry into the market in 2030.

“The companies will add to the growing supply of lithium, as the deal seeks to double output in the Atacama Desert,” ANZ commodity strategist Daniel Hynes said, adding that a sustained recovery in the sector would come – eventually.

“Strong supply response to the recent collapse in the price of lithium is setting the stage for a market rebalancing, but a sustained recovery is unlikely until overcapacity in the supply chain for lithium batteries is reversed.”

In May, Rio chief executive Jakob Stausholm said he was “not afraid of M&A” but did not want to depend on it for growth. Speaking at a Bank of America conference in Miami at the time, Mr Stausholm said Rio had “a lot of growth options organically”, and warned big acquisitions may “derail what you are trying to do and that is a negative synergy”.

Those comments came after Rio’s largest rival, BHP, lobbed a takeover bid for London-headquartered diversified miner Anglo American, largely for its copper assets. That bid was rejected, and BHP has walked away from the proposal.