Morningstar calls Rio Tinto deal 'value destructive' for Arcadium Lithium shareholders

11:22am today

The news: Morningstar analysts have slashed their fair value estimate for lithium producer Arcadium after it sealed a $9.9 billion takeover deal by mining giant Rio Tinto.

The numbers: Morningstar cut the dual-listed Arcadium’s value to US$5.85 ($8.68) a share from US$10 earlier, to reflect the deal price.

By contrast, Rio Tinto’s fair value estimate was lifted 4% to $112 a share, to reflect the value accretive nature of the deal.

Rio shares were down 0.3% at $119.51 in early trading on the ASX, while Arcadium’s ASX-listed shares were down 0.06% to $8.19 each.

The context: Analyst Jon Mills said the US$5.85 deal value for Arcadium essentially values the company at its current volumes, with little valuation for any greenfield project development.

He called the deal negotiated by Arcadium as “value destructive” to shareholders.

By contrast, Rio is getting the better side of the deal, although it will have modest impact on the company. Rio’s strong balance sheet means the cash cost to acquire Arcadium is manageable, and net debt will likely remain minimal, he said in a note.