Rio pays premium multiple for Arcadium in biggest deal since 2007

The move would position Rio Tinto as one of the world’s largest lithium miners, behind only US-based Albemarle (NYSE: ALB) and Chile’s SQM (NYSE: SQM).

The acquisition would hand Rio lithium mines in Argentina and Australia, as well as processing facilities in the US, China, Japan and the UK. Its customer base would include major names, such as Tesla, BMW and General Motors.

The falling market prompted Rio to act, chief executive officer Jakob Stausholm told Reuters, seeing the downturn as an opportunity to pick up top quality assets at the right price.

“We really want battery-grade lithium, i.e. the processing as well. And then, of course, we like to be an operator, and if you take those criteria, you very quickly come to Arcadium,” he said.

“The way you should think about it is kind of a reverse takeover. This is not a case about cutting costs. This is a case about building faster and better,” Stausholm told Reuters.

Price slump

The spot price for lithium carbonate in China is down more than 85% from a peak in 2022 as supply overwhelmed demand from the electric vehicle sector where growth has cooled at the same time.

Arcadium Chairman Peter Coleman said Rio would be able to bring its expertise in execution and a strong balance sheet to help develop Arcadium’s assets. 

“They are not capital constrained … For us, we know that growth plans still relied on an improvement in price over the next two to three years, which is quite a significant improvement over where we are now,” he told Reuters.

Bolt-on

“The reality is that Rio really hasn’t grown in a decade, but now we’re back,” Stausholm told Bloomberg in a phone interview.

The miner began more seriously considering options at the start of the year, looking at “basically all of the lithium projects around the world,” Stausholm said.

For Rio, with a market capitalization of $112 billion, Arcadium is seen as a bolt-on deal. It’s still a test of the miner’s deal-making mettle in a new era of constrained spending, as the biggest acquisition since Rio’s $38 billion all-cash acquisition of Alcan Inc. in 2007. That purchase, after a bidding war, ultimately left Rio with $29 billion in charges.

“Alcan, in hindsight, was bought at the top of the cycle,” Stausholm said. “We feel quite comfortable that we have not bought a lithium company at the top of the cycle right now. We had to pay a fair price, and that’s what we’re paying.”

DLE

“It was a huge piece of work, but what became very clear to us was we would like to have exposure to brines,” Stausholm told Bloomberg, adding Arcadium produces battery-grade lithium from direct extraction.

Vulcan Energy’s (ASX: VUL) founder and executive chair, Francis Wedin, said the company views the development as a favourable one for the broader lithium market, particularly because it shines a spotlight on adsorption-type direct lithium extraction (A-DLE) production, used by Arcadium since 1996 next door to Rio’s own A-DLE project in Rincon. 

“The fact that Rio is joining Exxon and Equinor by focusing on A-DLE is a further indication of how the third wave of lithium’s growth is developing,” he said in an emailed statement. 

Rumours swirled

Arcadium was created in January from the merger of Philadelphia-based Livent and Australia’s Allkem. Its shares have fallen since, dragged by declining lithium prices, which in turn are a result of weaker demand from electric vehicle (EV) makers and Chinese oversupply.

BMO Capital Markets said in a note the transaction provides Rio a producing foothold at a price that it can easily afford.

“However, our initial take suggests a premium multiple paid, unless Rio Tinto can demonstrate meaningful synergies and/or expectations of significantly higher future lithium prices.”

Ahead of the confirmation of the deal BMO Capital Markets noted a potential takeover has been part of market rumours for years.

“Many investors believe that Arcadium (i.e., the Allkem/Livent merger) was completed to shake out interest from suitors like Rio.”

Battery ambitions

Over the past six years, Rio has been expanding its footprint in the battery market. In 2018, it attempted to buy a $5bn stake in Chile’s SQM, the world’s second largest lithium producer. 

In April 2021, the world’s second largest miner kicked off lithium production from waste rock at a demonstration plant located at a borates mine it controls in California. 

Rio took another key step into the lithium market in 2022, completing the acquisition of the Rincon lithium project in Argentina, which has reserves of almost two million tonnes of contained lithium carbonate equivalent, sufficient for a 40-year mine life.

The company plans to develop a battery-grade lithium carbonate plant at Rincon with an annual capacity of 3,000 tonnes and has earmarked $350 million to invest in the project, with first production expected later this year.

It is also trying to revive one of its biggest lithium projects, the proposed $2.4 billion Jadar mine in Serbia. Rio had its mining licence revoked in 2022, following widespread protests against the proposed mine on environmental concerns.

The mining giant won a small, but key battle in July, as Serbia reinstated Rio Tinto’s licence to develop it, but the company will have to secure approvals to move towards production at the site. On Monday, however, the country’s parliament began debating a proposal to ban lithium and borate mining and exploration. If passed into a law, this would effectively put an end to the contested Jadar project.

With projected production of 58,000 tonnes of refined battery-grade lithium carbonate per year, Jadar would be Europe’s biggest lithium mine.