ii view: Rio Tinto pays $6.7bn for lithium miner

Acquistion of US listed miner Arcadium for $6.7 billion

Chief Executive Jakob Stausholm said:

“Acquiring Arcadium Lithium is a significant step forward in Rio Tinto's long-term strategy, creating a world-class lithium business alongside our leading aluminium and copper operations to supply materials needed for the energy transition.”

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ii round-up:

Mining giant Rio Tinto Registered Shares (LSE:RIO) today confirmed a $6.7 billion (£5.1 billion) takeover of US listed lithium miner Arcadium Lithium (NYSE:ALTM) in a move aimed at boosting exposure to climate change friendly, energy transition metals. 

Rio will acquire Arcadium in an all-cash transaction worth $5.85 per Arcadium share, a 90% premium to its closing price of $3.08 per share on 4 October. Lithium is used to make rechargeable batteries for mobile phones, laptops and electric vehicles as well as non-rechargeable batteries such as those used for clocks and heart pacemakers. 

Against a backdrop of renewed concerns about China’s economic growth, Rio shares fell 0.5% in UK trading. The FTSE 100 listed miner came into this latest announcement down 14% year-to-date. That’s similar to rival Glencore (LSE:GLEN) and in contrast to a 6% gain for the FTSE 100 index.

Regularly sold to China, Australian iron ore accounts for Rio’s biggest chuck of adjusted profit (EBITDA) at around three-quarters, with other metals including copper, aluminium, and existing lithium production making up the balance.  

Arcadium's annual lithium production capacity of 75,000 tonnes, and with plans to double that by 2028, now leaves Rio with the world's largest lithium resource base and makes it one of the leading producers of the metal. 

Bringing together both Rio’s and Arcadium's assets in Canada and Argentina, Rio expects Arcadium's projected growth capital expenditure to come in at around 5% of its own group-wide capex of up to $10 billion in both 2025 and 2026. 

Rio Tinto management considers the acquisition to be counter-cyclical. The price of lithium is down more than 80% since its peak and is expected to rise in future. 

Broker Morgan Stanley reiterated its ‘overweight' stance on the shares following the acquisition news, flagging Rio as a ‘top pick’. 

ii view:

Tracing its history back to 1873, Rio Tinto today employs more than 55,000 people in over 30 countries, with strong presences in both Australia and North America. Headquartered in London, group rivals include Anglo American (LSE:AAL), Antofagasta (LSE:ANTO) and BHP Group Ltd (LSE:BHP). Lithium is forecast by analysts to generate around 4% of Rio’s revenues and adjusted profits come 2028. Rio’s copper production, also used in batteries and widely across electrical products, is being expanded via the development of its underground resource at Oyu Tolgoi, Mongolia.

For investors, the $6.7 billion price is $0.5 billion ahead of the rumoured price but still a sensible level, although that will be dependent on the successful execution of Arcadium's growth plans through to 2028. Concerns about the economic health of its biggest customer China, at nearly 60% of annual sales, persists – steel ingredient iron ore is used widely there. The West’s relationship with China is now more strained given its closer tiers with Russia, while safety and employee fatalities industry-wide are not to be forgotten.  

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On the upside, Rio is confident in the long-term outlook for lithium, given expected demand growth of more than 10% on a compound annual growth basis through to 2040.  Commodities such as lithium and copper are in demand for energy transition products such as solar panels, wind turbines, power cables, and energy storage systems. Efforts to improve its Environmental, Social and Governance (ESG) policy are ongoing, while balance sheet strength persists, with the purchase of Arcadium lifting its net debt-to-adjusted profit (EBITDA) ratio from under 0.2 times to around 0.5 times.

In all, worries regarding China and broader global economic growth, as well as heightened geopolitical tensions, cannot be ignored. But with the consensus analyst estimate of fair value sat above £59 per share and the forecast  dividend yield in the region of 6%, grounds for longer-term optimism look to persist. 

Positive

• Selection of different commodities mined
• Attractive dividend payment (not guaranteed)

Negative

• Uncertain global economic outlook
• The weather can impact performance

The average rating of stock market analysts:

Buy