A Rio Tinto bid for Arcadium makes sense, if the dollars stack up
Rio boss Jakob Stausholm has given investors every reason to believe reports that a lithium deal is imminent.
Peter KerOct 6, 2024 – 6.33pm
Rio Tinto chief Jakob Stausholm is looking at lithium as a path to growth. Jamila Toderasnormal
Investor confidence in Rio’s willingness to spend billions on a lithium acquisition crystallised in the form of a 36 per cent rally in Arcadium Lithium shares during extended trading in New York on Saturday AEST.
By definition, an inflection point is one where the journey changes, and in Rio’s case, the clear message was that internal growth might soon be replaced by the type of growth that could be found elsewhere.
It was a phrase used deliberately by Stausholm, and it appeared twice in the written materials that Rio filed to the ASX that day.
“When I started, many investors warned me against looking toward deals, but that wasn’t a problem because there were so many great opportunities we could do inside the company,” he explained on July 31.
“I think we are in a different stage now, and I don’t hear the similar challenges from our investors.”
Having declared that the company and its shareholders were ready for deals, Stausholm narrowed the focus to his preferred commodities.
“We would like to strengthen our lithium business, and we also have opportunities to grow our copper business,” he said.
While prices for copper metal and copper mines are riding high, lithium is suffering through a bear market that has left most producers vulnerable.
Buying assets during cyclical downturns is the holy grail for bosses of big miners such as Rio. ‘There will be growth’
“I couldn’t care less about what the lithium price is in the next 12 months, I am more thinking about how will the market and the demand be over the next decade or two,” said Stausholm in his July comments.
“Lithium is necessary in almost any construct of a battery, so there will be growth in lithium.”
Lithium can be produced in several ways, so Stausholm made sure that investors knew he preferred the South American method of extracting it from groundwater, rather than the Australian method of crushing it out of hard rocks. Chile and Argentina earned a mention.
Rio is scheduled to produce its first lithium at its Rincon project in Argentina in the next two months.
Argentinian president Javier Milei has offered tax breaks for those who develop projects within the next couple of years, and Stausholm said the policy had improved the financial case for Argentinian lithium projects such as Rincon.
He casually dropped into the conversation that he had previously lived in Argentina while working for oil giant Shell, just to soothe any nerves about sovereign risk.
But Stausholm’s next comment was the one that really put Arcadium in the crosshairs.
“The big challenge about M&A is you have to be sure that your synergies are bigger than the premium; otherwise it tends not to work out,” he said.
Arcadium’s flagship Olaroz lithium asset is just 60 kilometres north-east of Rio’s Rincon; that’s a proverbial stone’s throw in the “lithium triangle” that straddles the Argentinian and Chilean border.
Rincon is also closer to Arcadium’s other production zone at the Salar del Hombre Muerto than Olaroz is.
Rio and Arcadium’s Argentinian assets may not be literally adjacent, but combining them would probably deliver meaningful synergies across procurement and external relations. Compelling financial logic
A combination would also offer compelling financial logic; Arcadium has been slowing its growth projects because it is struggling to fund them while lithium prices and revenues are weak.
With a gearing ratio at the very low 8 per cent, Rio can easily afford to pay $5 billion for Arcadium and pump further money in to get those growth projects moving again.
As they try to separate fact from speculation this week, Rio shareholders should assume that a bid for Arcadium or Albemarle – which also has assets in the lithium triangle – is probable.
Both would give Rio a vertically integrated lithium business of global scale and quality, diversified by nation and straddling both the hard rock and groundwater sides of the industry.
But for all the breadcrumbs Stausholm has laid out, the price still has to be right. It will take dough, and lots of it, to convince quality companies such as Arcadium and Albemarle that an offer at the bottom of the lithium bear market is not opportunistic.
PLS Price at posting:
$3.05 Sentiment: Buy Disclosure: Held
(20min delay)