Rio Tinto, one of the world's largest mining companies, has recently announced a significant investment deal with Arcadium Lithium plc, a rapidly growing lithium producer, underscoring Rio Tinto's continued commitment to expanding its footprint in the energy transition metals market, particularly in lithium, a crucial component in the production of electric vehicle (EV) batteries and renewable energy storage solutions.

The Deal

Rio Tinto (ASX: RIO, market cap: AUD 168.23B as of 16 Oct 2024) and Arcadium Lithium plc (“Arcadium Lithium” or “Arcadium”) (NYSE: ALTM, market cap: USD 5.95B as of 16 Oct 2024) (ASX: LTM) announced a definitive agreement (the “Transaction Agreement”) under which RIO will acquire LTM in an all-cash transaction for US$5.85 per share (the “Transaction”). The Transaction represents a premium of 90% to LTM’s closing price of $3.08 per share on 4 October 2024, a premium of 39% to LTM’s volume-weighted average price (VWAP) since LTM’s listing on 4 January 2024, and values LTM’s diluted share capital at approximately $6.7 billion. The Transaction is expected to close in mid-2025.

Source: Rio Tinto Official Website

Valuation Premium

A 90% premium over the closing price of $3.08 per share is huge. The RIO acquisition of LTM at US$5.85 per share represents a substantial premium over LTM’s recent trading levels, RIO’s willingness to pay a large premium suggests its confidence in the sustained demand for lithium and its willingness to invest heavily in securing future lithium supply to complement its current commodity portfolio in a long-term strategy. It also reflects RIO’s strong interest in LTM’s lithium assets and suggests that RIO sees the long-term value in these assets far beyond the current market valuation.

Strategic Rationale Behind the Deal

This deal is a win-win for both companies. RIO gains a foothold in a key market, and LTM accelerates its growth with access to significant resources and operational expertise brought by RIO.

Growing Demand for Lithium

The global demand for lithium is accelerating as the world transitions to greener energy. Electric vehicles (EVs) are at the heart of this shift, and lithium is a crucial element in EV battery production. RIO remains confident in the long-term outlook for lithium, projecting a compound annual growth rate of over 10% in demand through 2040, leading to a potential supply deficit. As spot lithium prices have fallen by more than 80% from their peak, this counter-cyclical acquisition presents significant long-term market and portfolio upside for RIO. 

Diversification Purpose

Commodities

RIO has historically been heavily reliant on iron ore and aluminium, its revenue from which accounted for 78% of the total in 2023. However, fluctuations in global demand for these commodities and growing pressures from climate change policies necessitate diversification.

RIO has been increasingly focused on expanding its portfolio in the battery minerals sector to capitalize on this demand. LTM’s rich lithium resources (combined lithium resource base of 53M tonnes LCE that ranks among the largest in the world) offer RIO a way to diversify into a commodity with strong long-term growth potential, mitigating the risk associated with relying too heavily on traditional commodities.

In turn, LTM stands to benefit from RIO’s extensive experience in large-scale project management, proven project delivery capability, strong balance sheet and access to global markets, helping LTM accelerate its growth trajectory.

Geographies

LTM operates resources in Argentina and Australia, along with downstream conversion assets in the U.S., China, Japan, and the U.K.. LTM is also actively developing multiple projects in Argentina (both greenfield and brownfield) and in Canada (greenfield) to expand its production capabilities. RIO currently only has two lithium projects including the Rincon Lithium Project in Argentina, which remains undeveloped, and the Jadar Project in Serbia. This deal allows RIO to diversify its lithium supply geographically, reducing geopolitical risks, and securing a more stable lithium supply.

Complementary Advantages From LTM: Technology and Network

LTM is a leading global lithium producer with the widest offering of lithium chemical products and a world-class manufacturing network. It has a broad technology portfolio and expertise in the lithium value chain including its ILiAD Technologies – the next-generation Direct Lithium Extraction (DLE) Technology and LIOVIX Technology - a key technology for the commercialization of lithium metal anodes and solid-state batteries. LTM also has multi-year relationships with leading car manufacturers e.g., Tesla, Volkswagen, General Motors, and BYD and battery companies e.g. Panasonic and CATL.

Additionally, in the U.S., LTM operates the only integrated mine-to-metal production facility in the Western Hemisphere for high-purity lithium metal, the core component of next-generation battery technologies. The facility will increase the convenience and reduce the transportation cost for RIO to produce high-purity lithium metal from its Rincon Lithium Project in Argentina in the future.

LTM’s technological leadership in lithium extraction, world-class manufacturing network in the lithium supply chain and integrated production facility in the Western Hemisphere can not only help to improve and expand RIO’s lithium business alongside its leading ore and aluminium operations but also position RIO as a major supplier for the EV industry in the downstream battery materials market.

Given the favourable market environment, who would be the next lithium targets for acquisition? Below a list of similar lithium juniors who might emerge as potential candidates for premium takeovers.

Market Cap as of 17 Oct 2024.
Source: Company official website, Refinitiv