Research on RIO going into Lithium - interesting read
Going deep into lithium
NEED TO KNOW:
RIO acquires Arcadium Lithium for US$6.7bn cash.
Combined targeted annual lithium carbonate equivalent LCE)
production of 373ktpa.
Tier 1 lithium asset base across Australia, Canada, Argentina.
INVESTMENT IMPLICATIONS
In the context of RIOʼs total business, the acquisition of Arcadium Lithium is
relatively small. But it signals a substantial commitment to the global lithium
business and elevates its existing lithium assets.
RIO has agreed to acquire Arcadium Lithium LTM) for US$6.7bn cash. The
transaction is expected to complete in mid-2025. Both companyʼs Boards have
approved the transaction.
Arcadium Lithium was the result of the merger between Allkem and Livent in
January 2024. LTMʼs assets span three crucial lithium geographies across
Australia, Argentina and Canada with a combined asset base that is the largest
in the world. The portfolio includes lithium brine operations in Argentina, hard
rock lithium operations in Australia and a lithium hydroxide conversion facility in
Japan.
LTM produces battery grade lithium hydroxide, lithium carbonate and other
lithium products for various applications. The primary end market is for batteries
in electric vehicles where LTM has extensive commercial agreements with
multiple global EV manufacturers including Tesla, Ford, Toyota, GM and BMW. A
typical EV requires approximately 85kg of lithium products.
LTM is a vertically integrated lithium producer with among the lowest cost
lithium mineral deposits in the world.
At the time of the Allkem merger with Livent, lithium commodity prices were
much higher than today. The merger created a US$10.6bn company with annual
revenue of approximately US$1.9bn and EBITDA US$1.2bn pre-synergies of
approximately US$125m pa.
The dramatic fall of lithium commodity prices throughout 2024 has clearly
presented RIO with a different valuation of LTM so the comparison of market
value to the Allkem/Livent merger is not relevant. Spot lithium prices are down
by about 80% from the recent peak.
Instead, RIO CEO Jacob Stausholm sees a multi-decade investment in lithium
where the average price over a long period of time is likely to be higher.
RIO noted that the capex requirements for LTM represented less than 5% of RIO
group requirements. LTMʼs growth plans are for capacity to expand by 130% by 2028
RIOʼs timing of this acquisition is arguably good considering the low point reached in lithium commodity prices. But this acquisition is more
about establishing a serious, globally significant earnings stream based on the expected long term demand growth profile for lithium.
In the context of RIOʼs group earnings, it will be small initially, but it does also provide diversification from the iron ore, aluminium and
copper assets.
Commodity prices generally have been weak this year, so with China beginning to ramp up its economic stimulus, the time is right to buy RIO
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