Rio Tinto (RIO) has become the first large multinational miner to acquire a major lithium business, after its recent offer to acquire Arcadium Lithium (LTM) (Focus Portfolio 2% weight) for an equity value of US$6.7bn (~A$9.9bn).
RIO's offer represents a substantial 90% premium to the stock’s prior close.
The deal not only offers attractive value for LTM shareholders, but it is also a vote of confidence in the long-term fundamentals of the lithium market.
RIO’s desire to expand its lithium operations makes sense at this juncture, given the company’s clear desire to diversify into energy transition metals, and the opportunity to take advantage of the current weakness in the lithium market to acquire high-quality assets at a reasonable price.
Arcadium Takeover Offer – Rewarding Patient Capital
Deal summary
RIO's all-cash offer to acquire Arcadium Lithium (LTM) for US$5.85/share (~A$8.70/share) represents a total consideration of US$6.7bn (~A$9.9bn).
The deal has been unanimously approved by the boards of RIO and LTM.
The offer price represents a premium of 90% to LTM’s prior closing price, and a 39% premium to its VWAP (volume-weighted average price) since the start of the year.
The deal is expected to close in mid-2025 once regulatory approvals are received, which includes an LTM shareholder vote (requiring 75% of voting rights in favour of the transaction) and the Royal Court of Jersey.
RIO’s offer represents good value for LTM shareholders
We agree with the LTM board that RIO’s offer reflects the ‘full and fair long-term value’ of the business.
The US$6.7bn offer is broadly in line with our assessment of fair value, at US$6.9bn.
Moreover, we note our valuation analysis uses positive long-term assumptions that look through near-term weakness in the lithium market, including a ‘through-the-cycle’ EV/EBITDA multiple of ~10x (rather than current FY28 sector multiples of ~5-6x), to reflect improvements in sentiment in the lithium market over the coming years.
Accordingly, we strongly encourage all LTM shareholders to vote for the Scheme of Arrangement.
| FY28 EBITDA (US$m) | 1,123 |
| EV/EBITDA multiple | 10x |
| Implied Enterprise Value (EV) (US$m) | 11,229 |
| Net Present Value at 13% discount rate (US$m) | 6,887 |
| RIO offer value (US$m) | 6,700 |
| Difference to offer | 2.8% |
*Refer to appendix for detailed valuation assumptions. Source: Visible Alpha, Refinitiv, Wilsons Advisory.
Strong Strategic Rationale for RIO
RIO’s astute acquisition creates a ‘world-leading lithium business’
RIO’s acquisition of LTM appears well-timed amidst ongoing weakness in the lithium market, which has allowed the business to significantly expand its global lithium portfolio with only a relatively modest capital outlay.
The key attributes that attracted RIO to LTM over other potential lithium acquisitions are consistent with our investment thesis for the business.
These include:
- Tier 1, low-cost portfolio – LTM’s asset portfolio consists of tier 1 assets, defined by large scale, high grades, and low current and future operating costs.
- Scale and production upside – the combined group is expected to be a ~200ktpa LCE mined lithium producer once projects are ramped over the coming four to five years, which will make RIO a top three producer globally. Last month, LTM already guided towards the doubling of its production by 2028, although we note RIO’s balance sheet strength will allow it to accelerate LTM’s production growth pipeline.
- Diversification and optionality – unlike the other ASX lithium majors, LTM has exposure across the entire lithium value chain, as it produces spodumene, carbonate, hydroxide and speciality lithium chemicals. LTM is also diversified across jurisdictions, market segments, and technologies (including direct lithium extraction). Given lithium is a rapidly evolving market – with uncertainty around where the most attractive part of the value chain might be in years to come - LTM’s broad diversification is appealing to RIO as a new entrant into the sector, given it provides optionality over future product types, asset types and geographies.
Vote of confidence in long-term lithium market fundamentals
While the near-term outlook for lithium remains weak, with the lithium price down 80% from its peak and the physical market expected to remain in oversupply over the near term, RIO’s acquisition of LTM validates the ‘highly attractive’ long-term fundamentals of the lithium market.
RIO’s investor deck highlights the ‘steepness’ of the lithium cost curve and points to industry forecasts of compounding supply deficits from the "late 2020's" driven by a >10% demand CAGR to 2040.
RIO has stopped short of calling a ‘bottom’ in lithium prices. In fact, CEO Jakob Stausholm went as far as saying he ‘couldn’t care less what the lithium price is in the next 12 months’. However, the business has expressed confidence that lithium demand and prices will move higher over the next decade.
This echoes our view that higher prices will be needed to incentivise new supply to meet the growing demand requirements of the energy transition, albeit the timing of a recovery in the lithium price remains uncertain.
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BHP still preferred over RIO
Notwithstanding the strong strategic rationale behind RIO’s acquisition of LTM, BHP remains our preferred exposure among the major ASX-listed iron ore miners. While we view RIO’s acquisition of LTM as incrementally positive for its long-term outlook, lithium will still make up only a relatively small share of group earnings over the medium-term.
In a relative sense, BHP continues to have a more attractive commodity mix with greater exposure to energy-transition metals, noting it provides:
- Less leverage to iron ore prices – even though BHP and RIO have similar exposures to iron ore, as the lowest cost producer BHP has less group EBITDA leverage to changes in the iron ore price, which is a key relative appeal given our structurally cautious stance towards the commodity.
- Superior copper exposure – copper accounts for a larger share of BHP’s portfolio, which alongside its marginally higher (albeit still low) position on the cost curve, results in greater group EBITDA leverage to the copper price. This is a key relative appeal given our structurally positive stance towards copper as a major energy transition beneficiary.
The Lithium Market is Consolidating
As lithium is still a relatively immature commodity market, further M&A deals appear likely over the next few years, as the industry continues to consolidate. The current weakness in the sector’s share market performance has spun-up opportunities for large players like RIO to build scale by acquiring high quality assets at a discount.
With RIO’s bid for LTM validating the long-term value accretion in lithium, market speculation around the potential for further M&A in the sector has driven a sharp rally in the lithium juniors on the ASX. This has been exacerbated by short covering.
However, the lithium majors on the ASX (outside of LTM) have not participated in this rally.
Too few potential buyers for the majors?
In our view, the reason the lithium majors haven’t rallied is due to the short-list of potential acquirers with the requisite balance sheet capacity, the necessary conviction in the lithium market outlook, and the operating expertise to take on lithium project development and operations.
Most of the major multinational miners outside of RIO - including BHP, Glencore and Anglo American - have expressed a lack of enthusiasm or conviction towards lithium, and have demonstrated a preference for increasing their exposure to other commodities like copper.
It’s a similar story among the global lithium majors. Albemarle is cutting costs and recently abandoned its expansion plans in Australia, SQM is currently loss-making, and already has significant investments in Australia via Azure Minerals and Wesfarmers, while Chinese majors Ganfeng and Tianqi would face significant political/regulatory challenges in expanding their (already significant) ownership of Australian lithium assets.
Moreover, the presence of blocking stakes (Liontown Resources, Pilbara Minerals), non-pureplay exposures (IGO, Mineral Resources), and stretched balance sheets (Mineral Resources) are further obstacles to M&A.
Accordingly, while the market appears ripe for M&A under the security of RIO’s bid, we see limited scope for a meaningful pickup in M&A activity among the majors.
Closing Thoughts - a Good Deal for Both Parties
In summary, RIO’s takeover offer to LTM is a good deal for both parties, and accordingly, we strongly encourage all LTM shareholders to vote for the Scheme of Arrangement.
With LTM still trading on a ~6% discount to the offer price, we expect LTM’s share price to converge with the offer price as the transaction progresses over the next ~6 months.
With respect to the Focus Portfolio’s current 2% position in LTM, we plan to use LTM as a funding source for other opportunities over the coming months.
While we remain positive on lithium’s long-term fundamentals, our bias is towards taking a ‘step back’ from the lithium sector until we see clearer evidence of a recovery in the lithium market, given the other ASX lithium majors do not appear to be viable takeover targets.
Appendix
| Valuation assumptions | ISG comments | |
| Discount Rate | 13.0% | Based on a beta of ~1.5x (vs LTM's historic beta of >2x), a risk-free rate of 4%, and a Equity Risk Premium of 6% (consistent with the standard assumptions used by Wilsons Advisory Research). |
| EBITDA (US$m) | 1,123m | Based on consensus FY28 EBITDA estimates to incorporate LTM's medium-term production growth plans. |
| EV/EBITDA multiple | 10x | Global lithium comps currently trade on FY28 EV/EBITDA multiples of ~5-6x. However, we have used a 'through the cycle' multiple of 10x to reflect the prospect of a recovery in sentiment in the lithium market (and a re-rate in lithium sector valuation multiples) over the medium term, noting the sector's long-term historical median EV/EBITDA multiple ranges from 8-12x. |
Source: Refinitiv, Visible Alpha, Wilsons Advisory.
Written by
Greg Burke, Equity Strategist
Greg is an Equity Strategist in the Investment Strategy team at Wilsons Advisory. He is the lead portfolio manager of the Wilsons Advisory Australian Equity Focus Portfolio and is responsible for the ongoing management of the Global Equity Opportunities List.
About Wilsons Advisory: Wilsons Advisory is a financial advisory firm focused on delivering strategic and investment advice for people with ambition – whether they be a private investor, corporate, fund manager or global institution. Its client-first, whole of firm approach allows Wilsons Advisory to partner with clients for the long-term and provide the wide range of financial and advisory services they may require throughout their financial future. Wilsons Advisory is staff-owned and has offices across Australia.
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