BREAKINGVIEWS-Rio Tinto distracted by shiny new thing

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

By Clara Ferreira-Marques SINGAPORE, Nov 22 (Reuters Breakingviews) - Rio Tinto (RIO) is getting distracted by a shiny new thing. The Anglo-Australian mining giant may be on the verge of buying a stake in $15 billion lithium producer Sociedad Quimica y Minera . After previously chasing aluminum at its peak, Rio is looking late again.

Excavators are emerging from a period of austerity. They have cleaned up a string of disastrous deals and slashed costs. Thanks to China and the surge of interest in electric cars, demand is growing. Materials including lithium, cobalt and copper are in vogue.

That helps justify a potential investment in SQM. It mercifully isn't a blockbuster along the lines of Rio's $38 billion takeover of Alcan in 2007. What's more, the commodity in question is on the rise. It's also one to which Rio has limited exposure.

This would nevertheless be Rio's first major deal since 2011 and its first under Chief Executive Jean-Sébastien Jacques. What Rio chooses to buy now sends a potent signal for the company, and perhaps even the industry.

In that sense, the transaction would be worrisome. Rio will not have control, if it's part of a consortium purchasing a 32 percent stake in SQM from Potash Corp of Saskatchewan POT.TO, as Reuters is reporting. There are few if any synergies. Prices for lithium, specifically battery-grade carbonate, have spiked over the last two years. They should ease as more supply becomes available.

SQM's valuation also has roughly doubled this year. It currently fetches 30 times expected earnings for the next 12 months. Lithium users like Apple and Panasonic <6752.T> trade at half as much. Rio's own multiple is just 11 times.

Ultimately, the bet could be that SQM's competition will be limited. Lithium projects are difficult to build and scale, even if the element is not rare. UBS, however, estimates current EBITDA margins for brine and mineral concentrate producers can reach 70 percent. At that rate, more investment is almost inevitable.

The cost of entry is high, though. That might make less of a difference for other potential suitors. China, for example, is encouraging the deployment of capital on both batteries and their ingredients. For Rio, the financial logic is less clear.

On Twitter http//twitter.com/claramarquesrtr

CONTEXT NEWS - Rio Tinto, Canada’s Wealth Minerals and Chinese private equity firm GSR Capital are considering a bid for a stake in Chilean lithium producer Sociedad Quimica Y Minera, Reuters reported on Nov. 21, citing unnamed banking sources.

- The companies are considering buying a 32 percent stake that Canada’s Potash Corporation of Saskatchewan must divest as part of its merger with rival Agrium.

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