Rio Tinto is considering a bid for Arcadium Lithium

Rio Tinto may make a bid to acquire a New York listed lithium miner, as the largest commodity groups in the world race to secure the metals and minerals that will power the global shift to cleaner energy. If the deal for Arcadium Lithium is successful, the second-largest miner in the world will be catapulted into the top producers of this metal that’s used to make electric vehicle batteries and energy storage.

Rio announced that it had approached Arcadium about a possible acquisition. The company added: “The approach was non-binding, and there is no guarantee any transaction will take place or be approved.”

Rio would gain access to lithium deposits, processing facilities, and mines in Argentina, Australia and Canada, as well as a client base that includes Tesla and General Motors. Analysts at Canaccord estimated that the combined group would account for about 10% of global lithium chemical supply by 2030.

Arcadium shares have fallen by 39 percent since the beginning of the year due to a sharp fall in lithium prices. This is partly due to the oversupply in China and the falling demand for electric vehicles. However, the demand for lithium is expected to increase sharply due to the growth of the lithium-ion battery market.

Rio has two projects in lithium, Rincon, in Argentina, and Jadar, in Serbia. However, neither project has an official start date. Jadar is experiencing delays due to environmental protests, despite the fact that the government restored Rio’s license in July. The combined annual output of both mines will be around 58,000 tonnes.

Arcadium produced 20100 tonnes of Lithium hydroxide, and Carbonate, during the first half of the year, and 53 500 tonnes of Spodumene Concentrate, which is a major source of lithium. Jakob Stausholm said that after the fall in lithium prices, the assets of Rio were now more attractive.

The Danish executive of 56 has indicated that he’s more willing to pursue larger deals. He told analysts in July, “We can do this”, but also added, “it is not easy to justify high premiums, and we definitely are not in the M&A business to become bigger.” We only engage in M&A if it can generate shareholder value.

Stausholm responded to a question about the attraction of the lithium market: “It is fair to say it is cheaper than a few years ago.” We have to consider what the average price will be over the next 10, 15 or 20 years.

Reuters reported that last week, the companies were in talks regarding a possible deal which could value Arcadium between “$4 billion and $6 billion or more”.

Andy Forster is a portfolio manager at Argo Investments which owns shares in both companies. He warned against high valuations of Arcadium. The company had many growth plans but did not have the financial resources to implement them. He said that “the economics of lithium long-term pricing is no longer what it was”.

Blackwattle Investment Partners, in a letter sent to Arcadium, said that any offer in the range reported would “significantly” undervalue the company. Blackwattle Investment Partners said that in their opinion, the sale price of LTM would be closer to $8 Billion, and LTM could be prepared to reject an opportunistic bid.

A number of miners are looking to make deals in order to secure metals that will be needed to transition to low carbon energy sources. BHP failed in its bid to acquire Anglo American for £39 billion in May. Copper is used to make green technologies such as electric vehicles, windmills, and energy networks.

Anglo’s mines are capable of producing around 760,000 tonnes copper per year in Peru and Chile. Rio has three copper mines in Australia, America, and Mongolia. The Oyu Tolgoi Mine is being expanded to produce 500,000 tonnes of copper annually between 2028-2036.

Arcadium’s Australian shares rose up to 50 percent, reaching A$6.29. This triggered a surge in other lithium-listed companies listed in Australia. Arcadium’s shares in New York rose 35.4% to $4.17 and valued the company at $4.5billion. Rio Tinto shares in London closed at £53.00, a flat closing price.

The world’s biggest miners are racing against time to increase their exposure to metals and minerals that are viewed as essential to powering energy transitions.

Rio Tinto’s bid for Arcadium Lithium – a lithium mining company and processing firm listed in New York, Australia and New York – would accelerate the FTSE 100 Group’s push into Lithium – a key component in batteries for electric cars.

Rio has two projects for lithium in the works – Rincon in Argentina, and Jadar in Serbia – but there is no start date yet. Arcadium produced 20100 tonnes of Lithium hydroxide, carbonate and spodumene during the first half of the year.

Kaan Peker is an analyst with RBC Capital. He believes that Rio’s interests are “opportunistic” and countercyclical. The lithium price has fallen over the last 18 months due to a glut of Chinese supplies on the market, and a slower demand for electric cars. Prices for lithium carbonate are now $10,800 per tonne. This is down from over $80,000 by the end of 2022.

Arcadium announced that it would reduce its spending by $500 millions over the next two years in response. Peker believes that a Rio takeover could eliminate the limitations on Arcadium’s production growth. Peker believes that Rio’s low gearing of 8 percent at the end June means an all cash offer is more likely. After adding a 30% bid premium, an offer of $4.6 billion could be made. This would still be only slightly higher than its May valuation. Rio may also be able to purchase Arcadium for a bargain price. Even after the announcement of Rio’s interest, New York-listed shares are down 36 percent this year.

Protests by environmentalists against the Jadar Mine have complicated efforts to expand its exposure organically to lithium. The mine will have a production capacity of 58,000 tonnes per year. Rincon will likely have a similar output.

Rio plays the long game despite the price drop. World Economic Forum predicts that the demand for lithium will reach 1.5 million metric tonnes of lithium equivalent by 2025, and over 3 million metric tonnes by 2030. The production last year was around 180,000 tonne.