MELBOURNE, Oct 15 (Reuters) -
Rio Tinto's purchase of lithium miner Arcadium
may herald more to come as cash-rich investors seek entry to the energy transition sector, where valuations have been battered by tumbling prices for the metal.
Rio Tinto CEO Jakob Stausholm told Reuters last week that a weak market had yielded an opportunity to pick up top quality assets at the right price, triggering its $6.7 billion buy.
While lithium prices are not expected to bounce back soon, demand should outstrip supply by 2030. Given that, Rio is unlikely to be alone in seeing the appeal of mergers with existing companies, according to bankers, executives, and analysts.
An increase in mergers would demonstrate that companies are backing a long-term view of lithium's increasing value and recognising a need to increase size through acquisitions to play a growing role in the energy transition.
The potential buyers are "probably those that have ... strong cash flow from existing operations saying 'Actually we think lithium is where we want to be in five to ten years,'" said Adam Martin, executive director for energy at financial advisor E&P in Melbourne.
The most likely companies are currently outside the lithium space and realize building projects from scratch will be "pretty hard to replicate," he said.
Demand is expected to more than double by the end of the decade to around 2.7 million metric tons of lithium carbonate equivalent $(LCE.AU)$, from around 1.2 million tons this year, according to broker Canaccord.
Lithium prices are down about 80% from their record at the end of 2022 above $70 per kg, dragging producer valuations lower. However, prices will likely double to $19 per kg in the long-term, from about $11 a kg currently, Arcadium said last week, citing the median of estimates of analysts it consulted.
Opportunities exist for companies that can buy now and wait it out, prove up the economics and then make good, said Sherif Andrawes, head of global natural resources for tax advisor BDO.
Rio's Arcadium purchase and Pilbara Minerals' $377 million deal in August for Latin Resources are the "two obvious examples and I would not be surprised at all to see more," he said.
Still, there are factors that may shrink the number of buyers for lithium acquisitions. Rio and Pilbara's purchases remove them from contention, while an oversupplied carbonate market and developments of alternative battery technologies have thinned out the buyer pool, said two bankers that work on energy and mining mergers.
SMALLER COMPANIES
Smaller-scale lithium developers close to production are under pressure from falling cash stockpiles and difficulty raising capital, BDO said in June.
Consolidation will be needed to give companies more options, said a board member at a junior lithium company who asked not to be identified so he could speak freely.
The recent low prices have been tough for the industry and made it difficult for them to raise money, said an executive at a lithium developer who also asked not to be identified, adding that gold miners are seeking stakes in producers as they have cash holdings and want to diversify operations.
But even larger developers like Canada's Patriot Battery Metals could attract buyers because its Shaakichiuwaanaan project could be scaled up and for its strategic location in Quebec, Macquarie Bank said in a note in August.
Patriot did not respond to a request for comment.
Brazil's Sigma Lithium is also possibly for sale after last year considering buyout proposals from several companies though CEO Ana Cabral-Gardner said in April she would not sell her company amid depressed lithium prices.
Albemarle , with its global operations, also became more attractive to possible buyers following Rio's purchase, analysts at Jefferies said in an Oct. 9 note. Albemarle said it would not comment on rumours or speculation.
Chevron , Saudi Aramco and other oil companies have also shown an interest in the sector amid the growing popularity of direct lithium extraction technologies.
Australian iron ore miner Fortescue has said it is actively looking for lithium deposits, including through equity stakes in developers in Canada and Portugal, a source who has been in discussions with the company said. Fortescue declined to comment on potential acquisitions.
Chile's SQM is looking for early-stage projects,
analysts say. It has partnered in the last couple of years with Wesfarmers and Hancock, as well as taking stakes in developers in Sweden and Namibia. SQM declined to comment.
In August, it announced the creation of SQM International Lithium to expand outside of Chile, aiming to boost production by at least 100,000 metric tons a year by the end of the decade.
($1 = 1.4843 Australian dollars)
($1 = 1.3779 Canadian dollars)
(Reporting by Melanie Burton, Additional reporting by Daina Beth Solomon in Santiago, Divya Rajagopal in Toronto and Ernest Scheyder in Houston; editing by Veronica Brown and Christian Schmollinger)
((melanie.burton@thomsonreuters.com Twitter: @MelanieMetals; +613 9286 1421; Reuters Messaging: melanie.burton.thomsonreuters.com@reuters.net))
Comments