I have been thinking... never a good thing on a Saturday evening.
I hear the explanations - merger of equals and all that, but it just doesn't feel that way
They are coming at this from two quite different places -
Livent have come out of the Lithium market as it once was - a very niche specialty chemical market.
This snip from an Orocobre presentation in 2009 shows how it used to be
Glass/ceramics was largely served by spodumene in mineral form - Greenbushes owned that space.
Batteries barely registered at 20% of the market
FMC, later to spin out Livent, were kings in the specialty Lithiums chemicals area.
And so it remains today. Livent have their heritage in butyl lithium for polymers, hydroxide for greases, lithium metal for alloys, organolithium products for pharma, and so on. They're rightfully proud of their know how in these areas.
When they started up the Hombre Muerto/Fenix project in '97, it must have been inconceivable that they would ever need another resource. It was so big, and so good that they could forget about exploring and just focus on getting better at doing specialty chemicals.
But everything changes and by the late noughties, a bunch of Australian explorers were sniffing an opportunity. ADY poked around in Rincon before flaming out in the GFC (Grrrr...!!!!). ORE started poking around in Olaroz in '07 and hooked up with TTC never to look back again. In WA, GXY were looking at spodumene and thinking we'd like a bit of that too (and then made a premature leap in to the Jiangsu converter that was almost a near death experience). But they could all see the emerging story (this GXY slide is from 2008) and the classic junior explorer chase for resources was on.
But not at FMC.
By 2015, it was all on as Tesla and BYD started to get traction and a whole bunch of explorers got moving in WA
I'll confess, I didn't give the hard rock guys much of a chance of competing on price and stuck resolutely with brine. Could have made so much more if I had foreseen that demand would eventually kick in to the extent that mining cost would become almost immaterial. I think FMC were probably way more convinced of that than I was, as they sat happily with their best in class brine resource. They didn't bother to stake more ground as Lithium One snaffled up all the acreage just over the hill, later to be taken out by GXY, and then by AKE - they had their chances... They didn't bother to participate in the scramble in WA. They just stuck to what they were comfortable with and enjoyed the higher pricing that was starting to come for carbonate and hydroxide.
Then they were spunout from FMC. Liberated to chase the EV revolution, perhaps? Not really, as they continued pumping more or less what they always had, and adjusted by trying to build conversion capacity to chase the hydroxide price premium. A company that was once one of the "big three" was being well and truly overtaken by the pack.
Ok, so, if you're still with me, my feeling is that Livent are very expert at the midstream and downstream processing that is in their blood, and that has continued to be their focus as the Li-ion EV revolution exploded around them. I'm searching for the right adjectives - complacent? sluggish? There's less kind words but we don't need to go there.
By comparison, AKE is a classic entrepenurial, extreme-risk-taking, Aussie junior made good - really out on a limb at times and hanging on by finger nails, but somehow having survived the tough times, is now due credit for staking out some monumental resources (still needs more in WA, but credit where it is due).
So now the sluggards want what AKE has got.
A week or so back I was looking at resources and Market cap to LCE ratios for a group of companies that had featured in an article.
Allkem looks pretty good.
Ok, outstanding....
You can do the maths on today's market cap ratios but AKE is grossly undervalued - perhaps due to a perception of brine being "more difficult" or "slower to develop", or maybe some discounting for sovereign risk. All too often, the spodumene projects are lined up in MT of ore and the brine projects are missing. It's like no one knows how to convert LiO2 to LCE....
So I then did a bunch more companies and only LAC was at the same sort of deep discount
Then along came the merger. So how do AKE and LTHM line up on resources?
Ok, now AKE has drilled deep to establish those resources, whereas Livent have their resource defined only to 200m, so yes, Hombre Muerto can grow (but again, they sat there and did nothing to prove it up???). Relative contribution of resources is very different to the 56/44 split in valuation implied in the deal.
What about the producing assets and the plans to exploit the resources?
I have been for a trawl through their website and presentations and tried to make some sort of sense of it
I figure that for the rest of the decade, the industry is mining constrained - the challenge is to get Lithium values out of the ground as quickly as possible and the fat margins belong to the miners - converters get a very industrial return. With that in mind I have split the assets and expansion plans in to "Primary lithium production" and "Midstream-conversion"
First is the Primary Lithium Production
The timing of the expansions is a little here and there - best guesses in some cases - and the capacity is name-plate rather than reflecting actual production and ramp ups, but that is the basis that they present in the presentation and the 2027 number is more or less matching their number.
Again, the relative contribution of growth is coming disproportionately from AKE- very different from the implied valuation split.
One very important point - note that they are proposing ponds rather than their absorption DLE process for HM3. Seems AKE pond know how might be rather valuable to an operation that seems under pressure to reduce fresh water consumption. Olaroz has always been very economical with water use...
And what about the downstream/midstream processing. Well, AKE is not without opportunities, but here we see that different focus again
I'm not a finanical guru but if I have aligned the numbers correctly (LTHM's financial year is calendar year), then they're not too flash in my opinion. Yes, they talk about their long term contracts which have yet to run off, and then everything will look wonderful, but more fool them for locking up less than advantageous terms in a volatile market.
So it is pretty clear to me what Livent get out of the deal - a diverse geographic footprint, a massive resource spread across multiple assets, a strong expansion plan, and the cashflows to fund it.
And what do AKE get out of it? I did some pros and cons a couple of days ago - I'm just not seeing it. Their technical expertise is certainly worth something, but so much of it is in markets that are of rapidly diminishing importance...
So I end up thinking that the deal undervalues AKE - yes, we'll get some rerating up to their multiples, but half the rerate is already in their pockets.
And then, I look at the culture, the focus, and the complacency that got Livent to this point, and I wonder if they're the right people to be driving the merged entity. I think better outcomes were possible.
In my case, the change of tax domicile will tip me out of this investment before the transaction closes, so maybe I'm conflicted. I'll stick around a while for the rerate, and in the hope that it is voted down (snowballs chance in hell) or that RIO or someone chimes in with a takeover bid. It's been fun...
