Rio’s US$6.7B Arcadium bid is its largest since 2007

Rio Tinto (ASX, LON, NYSE: RIO) plans to acquire Arcadium Lithium (ASX: LTM; NYSE: ALTM) in an all-cash deal valued at US$6.7 billion, the Anglo-Australian giant confirmed on Wednesday.

The acquisition would position Rio Tinto as one of the world’s largest lithium miners, behind only North Carolina-based Albemarle (NYSE: ALB) and Chile’s SQM (NYSE: SQM). It gives Rio lithium mines in Argentina and Australia, as well as processing facilities in the United States, China, Japan and the United Kingdom. Its customer base would include major automakers Tesla, BMW and General Motors.

The bid for the Philadelphia-based battery metal producer comes at US$5.85 per share, a 90% premium to its US$3.08 per share closing price in New York on Oct. 4. The transaction is expected to close in mid-2025.

Arcadium, created in January from the merger of U.S.-based Livent and Australia’s Allkem, has current production capacity of about 75,000 tonnes a year of lithium carbonate equivalent (LCE), BMO Capital Markets said in a note on Wednesday. Arcadium plans to reach around 170,000 tonnes LCE by 2028/29, which could complement Rio’s proposed 50,000 tonne LCE a year Rincon project in Argentina, the analyst said. He cautioned on the deal premium.

“Rio Tinto’s acquisition of Arcadium gets the company a producing foothold in lithium at a price that it can easily afford,” BMO mining analyst Alexander Pearce said. “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.”

Shares in Rio Tinto declined less than 1% to US$66.24 apiece in New York on Wednesday morning, valuing the company at US$112.4 billion. Arcadium stock gained 31% to US$5.54 for a market value approaching US$6 billion.

Price crash

Lithium for electric vehicle (EV) batteries has crashed over the past two years as Chinese oversupply gathered pace and formerly strong EV consumer demand eased. Lithium carbonate was US$10,800 a tonne on Wednesday, down from US$22,950 a tonne a year ago, according to the Wall St. Journal. Numerous lithium developers and miners have suspended projects.

That presented Rio with an opportunity to buy, CEO Jakob Stausholm said in an emailed statement. It places Arcadium’s lithium beside Rio’s aluminum and copper output to supply the global energy transition away from fossil fuels, Stausholm said.

“This is a counter-cyclical expansion aligned with our disciplined capital allocation framework, increasing our exposure to a high-growth, attractive market at the right point in the cycle,” he said. “We will bring our scale, development capabilities and financial strength to realize the full potential of its tier-one portfolio.”

BMO’s Pearce queried the deal’s short-term economics during depressed markets for the battery metal.

“At spot prices, Arcadium generates limited earnings before interest tax, depreciation and amortization and is free-cash flow negative near-term,” he said. “Rio Tinto could bring operational/technical improvements/synergies which may improve this, although difficult to quantify at this stage.”

Aracdium CEO Paul Graves noted the market in his prepared comments.

“This is a compelling cash offer that reflects a full and fair long-term value for our business and de-risks our shareholders’ exposure to the execution of our development portfolio and market volatility,” Graves said. “This transaction will give us the opportunity to accelerate and expand our strategy.”

Lithium buildup

Over the past six years, Rio has been expanding its footprint in the battery market. In 2018, it reportedly attempted to buy a US$5-billion 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 the next year, completing the acquisition of the Rincon project. It has reserves of almost two million tonnes of contained LCE, enough for a 40-year mine life.

Vulcan Energy (ASX: VUL), which is arranging debt financing for a lithium project straddling the Franco-German border, views Rio’s acquisition as favourable for the broader lithium market.

It shines a spotlight on a brine mining process called adsorption-type direct lithium extraction (A-DLE), Vulcan founder and executive chair Francis Wedin said in an emailed statement. It’s been used by Arcadium since 1996 next door to Rio’s Rincon.

“Focusing on A-DLE is a further indication of how the third wave of lithium’s growth is developing,” Wedin said.