Rio tilt at Arcadium is a decades-long bet on lithium James ThomsonOct 7, 2024 – 11.57am
Chanticleer
Rio Tinto can sniff a bargain in beaten-down miner Arcadium. But the sector remains divisive, and investors won’t want CEO Jakob Stausholm to overpay.
Jakob Stausholm sniffs a bargain in the lithium sector. David Rowenormal
Stausholm has certainly spent the past few months softening the market up for exactly this sort of transaction.
In July, as he presented Rio’s June half results, he declared the mining giant was at an inflection point, moving out of the turnaround phase that kicked off with his appointment in late 2020 (in the wake of the Juukan Gorge disaster) and into a new era of growth. Stausholm has committed to growing production from existing operations and projects at a compound annual growth rate of 3 per cent between 2024 and 2028.
But as veteran Barrenjoey analyst Glyn Lawcock asked Stausholm on results day: is 3 per cent really enough for a miner of Rio’s size? Probably not, so deals are very much on the table.
Like every other miner in the world, Stausholm would love to get his hands on more copper, but the sort of top-tier assets that the major miners want remain very expensive or difficult to extract from their owners. That’s exactly what BHP found in May; its bid for Anglo American was almost entirely about securing Anglo’s copper assets, but the deal was simply too complex to get done.
So for Rio, a meaningful deal in the lithium sector, at a time when lithium assets are cheap, makes sense. But price remains the big question. As Stausholm said in July, mining M&A is rarely easy. Synergies rarely stack up as the buyer hopes, and in the case of Arcadium, synergies look to be fairly limited beyond the commonality of Argentina.
“It’s not easy to justify big premiums, and we are definitely not in the M&A game in order to be bigger. We are only in the M&A game if we can create shareholder value,” Stausholm said in July.
Arcadium played a very straight bat to Rio’s approach on Monday, confirming Stausholm’s team has knocked on the door and declaring it “remains focused on executing its strategic vision and pathway to significant growth” as set down at its investor day in late September.
Given the intense pressure on its share price this year, chairman Peter Coleman (previously chief executive of Woodside) is unlikely to shut the door on his suitor completely. But with investors including upstart Sydney fund manager Blackwattle already demanding a bid of about $US8 billion, Coleman will be determined to extract a bid from Rio that at least reflects Arcadium’s replacement value.
But Stausholm will need to listen carefully to his investors, too. While he’s said publicly that he believes the market is now open to Rio considering M&A activity, investors will be wary of Stausholm overpaying for a business in the lithium sector, which remains divisive to say the least.
Stausholm is not discouraged by plunging lithium prices, which have dropped from a peak of $US6400 per tonne of spodumene in December 2022 to just $US790 a tonne. “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,” he said in July.
But there are plenty who argue the current short-term headwinds are indicative of longer-term problems.
A slew of car makers have recently scaled back with electric vehicle plans amid concerns that while demand will grow over the long term, it will be patchy and adoption might take longer than expected.
On top of this, the EV market is riven with oversupply from Chinese car makers; on Friday night, the European Union voted to boost tariffs on Chinese EVs as high as 45 per cent, arguing Beijing provides unfair subsidies to its carmakers.
The question marks over lithium demand are compounded by much deeper concerns about lithium supply. While the shuttering of lithium mines in Australia and China has given lithium prices a bit of support in recent weeks, more capacity needs to come out of the market.
But the opposite is happening. UBS analyst Levi Spry estimates that Chinese and African projects are coming online at a rate that means global lithium supply is growing at a compound annual rate of 20 per cent.
But more capacity is coming. Spry says Canada’s lithium sector wants to lift production capacity sevenfold by 2030, such that it produces 350,000 tonnes per annum of lithium carbonate equivalent. By 2035, Canada’s industry could produce all the lithium needed to meet demand from North American EV demand.
This all speaks to BHP’s view on lithium: there’s an awful lot of the stuff around the world, and the long-term cost curve is basically too flat; that is, unlike in copper, coal and iron ore, the best miners and best assets aren’t all that much more resilient than the most marginal projects.
Differences in opinion at the top of the biggest miners are nothing new, of course. And it’s frankly too early to tell whether BHP or Rio are right on lithium’s long-term prospects.
But if nothing else, the question marks over lithium demonstrate why Stausholm will want to ensure he does not overpay for Arcadium.
There’s no question that this is an important moment for Rio and for its chief executive. Stausholm has done an impressive job as firefighter-in-chief, slowing and carefully restoring Rio’s social licence, improving its operational performance, and changing its growth narrative.
During his tenure, Rio has finally got its Oyu Tolgoi copper project firing, it’s lifted profits from aluminium, it’s done important deals in metal recycling and it’s rebuilt its relationships with governments and traditional owners. It’s not perfect by any stretch, but Stausholm is right to now start looking outwards towards growth. Arguably, it and BHP have spent too long out of the M&A markets, and they are playing catch-up.
But while Rio’s enthusiasm for lithium is a carefully thought-out bet on the future, it is still a bet – and one that needs to be approached in a disciplined way.
PLS Price at posting:
$3.17 Sentiment: Buy Disclosure: Held
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