...good analysis from an independent (not lithium bull) Javier...

...good analysis from an independent (not lithium bull) Javier Blas.

...a A$10B 'mistake' perhaps Rio can easily absorb as its Simandou iron ore project will provide it huge dividends to offset.
Rio Tinto Makes a Multibillion-Dollar Bet Against China

The mining giant pays a premium for a piece of the lithium market Beijing already dominates.
October 10, 2024 at 3:00 PM GMT+11

By Javier Blas
Javier Blas is a Bloomberg Opinion columnist covering energy and commodities. He is coauthor of “The World for Sale: Money, Power and the Traders Who Barter the Earth’s Resources.”
------------------
In commodity markets, betting against China is rarely a good idea. And yet, that’s what mining behemoth Rio Tinto Plc is doing with a $6.7 billion all-cash deal to buy a lithium miner, its biggest transaction in nearly two decades.

Lithium is attracting headlines because it’s – at least for now – an indispensable mineral for the batteries that power electric vehicles1. An EV battery needs up to 85 kilograms (187 pounds) of lithium.

Rio’s purchase of New York-listed Arcadium Lithium Plc for $5.85 a share amounted to a whopping 90% premium to its undisturbed price last week. No matter how one looks at the deal — whether the premia paid or the ratio of enterprise value to underlying earnings — it’s clear that the acquisition is anything but cheap.
Who's Who in Lithium

China accounts for nearly a fifth of global mine production in lithium, a key ingredient to manufacture batteries for electric vehicles
Source: US Geological Survey
The risk for Rio isn’t about demand, as China certainly is building lots of electric vehicles, but supply. Overshadowed by the country’s gargantuan commodity consumption, it’s easy to forget that China is, too, a large supplier of some key raw materials. In some cases, it exploits its own domestic deposits; in others, its state-owned miners move overseas to exploit others.

Wherever the Chinese dominate, the result is typically the same: lower prices. Look what’s happened to cobalt, nickel, and aluminum. Chinese commodity groups not only boost supply, lowering overall prices, they also reduce production costs. In lithium, China is a giant: It accounts for nearly 20% of raw lithium and for about 65% of refined lithium output. China is, too, the biggest producer of EV batteries. It wants — and needs — lower lithium prices.

Rio is betting that China won’t destroy the lithium market in the same way it has done with other metals. The problem? China has already crashed it, bringing prices down to about $11,000 per metric ton, from the most recent peak in 2022 of nearly $85,000 per ton. Whether Beijing can reshape the cost curve is a question mark.

Fortunately for Rio, Arcadium has a position of strength when it comes to costs. Most of its operations sit at the very bottom of today’s cost curve. For example, its Hombre Muerto unit in Argentina runs at as little as $5,500 per ton, about half the current price. A key reason why Arcadium has lower costs is because it exploits lithium brine, rather than hard-rock containing lithium ores like lepidolite. Chinese miners often focus on the latter, which typically involves higher production costs. But Beijing is also moving into lithium brine, and over time I’m sure their cost will come down. Already, anecdotal evidence suggests that Chinese companies are finding ways to extract the lithium more cheaply and easily from the brine waters.
Battery Bubble

Lithium prices have plunged nearly 80% from their most recent peak as Chinese companies boost production well beyond demand requirements
Source: Benchmark Mineral Intelligence
If the cost curve remains unchanged, ultimately Rio should make money, perhaps a lot; even more if depressed prices constrain supply growth. Rio Chief Executive Jakob Stausholm is making that bet, going as far as telling investors it’s "probably in our interest" that lithium prices are trending lower. "The lower it goes in the next short period of time, the higher it would have to go later,” he said in a Wednesday conference call with investors.

True, today’s crash sows the seeds of tomorrow’s boom. But betting that Chinese miners won’t be able to lower costs is courageous. Rio, of course, has looked closely at the cost curve, analyzing dozens of projects around the world. It believes that lithium is different to, say, nickel and cobalt — where Chinese miners not only flooded the market, but changed the dynamics by slashing production costs.

Having spent nearly $7 billion, Rio shareholders would be forgiven for feeling a tad nervous, but countercyclical deals, even if expensive, are always better than top-of-the-market transactions. And Stausholm’s not betting the house: The purchase price compares well with Rio’s current market value of $110 billion. By combining its own lithium projects with those of Arcadium, Rio is creating a company able to challenge leaders such as Sociedad Quimica y Minera de Chile SA, Albemarle Corp., Tianqi Lithium Corp. and Ganfeng Lithium Group Co.

But the deal is not the walk in the park that he and his team are trying to sell. Rio had to pay dearly to be sure that 75% of all shareholders of Arcadium support the deal. Beyond, it is rolling the dice: First, that China won’t crash the market; second, that Argentina, where most of Arcadium’s assets are located, will stay on the pro-business path that its new President Javier Milei has set. Both are big bets; bigger if one is paying a premium of 90% for the assets.