Diversified mining titan Rio Tinto (ASX: RIO) is set to purchase the “world-class” lithium chemical producer Arcadium Lithium in an effort to grow its position as a global leader in the production of energy transition commodities. Valued at US$6.7 billion, the all-cash deal represents a sturdy 90 per cent premium to Arcadium’s closing share price of US$3.08 on the New York stock exchange on the 4th of October.
Management noted that the duo’s combined assets will now represent the world’s largest lithium resource base with a compelling growth pipeline, and help transform Rio Tinto into one of the leading lithium producers globally.
According to the company, lithium is one of the cornerstone materials in the world’s energy transition with about 80 per cent of all production allocated towards electric vehicles (EVs) and for energy storage purposes. More specifically, the metal is a key ingredient in lithium-ion batteries which play a pivotal role in powering EVs as well as modern-day consumer electronics such as mobile phones and laptops.
Arcadium is already an influential vertically integrated lithium chemicals producer with a vast asset base of long-life and low-cost operations scattered around the world. It also boasts multi-year commercial relationships with a host of leading battery and automotive manufacturers such as Tesla, Ford, BMW, and Toyota.
Its resource base is also expected to support 130% capacity growth by 2028 within geographical locations Rio Tinto already operates in, including Argentina and the Canadian province of Quebec. Rio Tinto believes that its own scale, development capabilities, and financial strength will help to fast-track Arcadium’s pipeline of lithium growth projects in future years.
The proposed transaction has been unanimously approved by both the Rio Tinto and Arcadium boards of directors and is expected to be wrapped-up by the middle of next year, subject to shareholder approval and other standard regulatory requirements.
Rio Tinto chief executive officer, 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. Arcadium Lithium is an outstanding business today and we will bring our scale, development capabilities and financial strength to realise the full potential of its Tier 1 portfolio.”
Rio Tinto already produces globally significant amounts of metals such as aluminium, iron ore, and copper. However, its exposure to lithium has been less profound until its move for Arcadium.
To illustrate this point, Rio Tinto’s existing resources combine for about six million tonnes of lithium carbonate equivalent (LCE), whilst Arcadium boasts some 37 million tonnes of LCE in its resource base.
Curiously, Rio Tinto sees the acquisition as a counter-cyclical expansion into a high-growth market which aligns with the group’s long-term strategy and disciplined capital allocation framework.
Many forecasts paint a bullish long-term scenario for the outlook of lithium, characterised by a supply deficit in the coming years. According to Rio Tinto’s estimates, demand for the metal is anticipated to rise at a compound annual growth rate of more than 10 per cent through to 2040. It believes a supply deficit could be on the cards from the late 2020s and beyond.
However, the price lithium has been in a trough over the last couple of years after previously surging by more than 1,000% from 2021 and into 2022. Since then, a muted macroeconomic climate and a slowdown in the uptake of EVs has seen the price of the metal sink by more than 80 per cent from its peak in late 2022.
As such, Rio Tinto’s acquisition of Arcadium could breathe some life back into the lithium sector, adding to another recently proposed corporate transaction in the same space.
Back in August, leading Australian lithium producer Pilbara Minerals informed the market of its plans to acquire fellow ASX-listed business Latin Resources in an all-script transaction valued at about A$560 million. The deal, if concluded, will see Pilbara expand its operations from Australia and into Brazil. The takeover is expected to be finalised in December this year.
So, despite the muted climate for lithium in recent times, Rio Tinto’s move for Arcadium and Pilbara’s pursuit of Latin appear to provide much needed encouragement for the metal’s longer-term outlook.
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