Rio Tinto's (ASX:RIO) counter-cyclical move in offering nearly $10 billion for London- and US-based Arcadium Lithium has exposed the enormous potential losses now facing the entire lithium industry here and offshore — including in China.
Rio’s offer is cheap — and so it should be, because the fortunes of the sector are vastly different to what they were earlier in the year, let alone in the boom years of 2021, '22 and '23.
In fact, the whole sector is cheaper, and that’s underlined by the performance of the Global X Lithium & Battery Tech ETF, an index which tracks the stocks of companies involved in the industry and which is down over 50% from its peak in November 2021.
Until Rio’s bid this week, this was a sector the global mining majors had avoided.
Rio is, in fact, the only top-tier miner to make a definitive play into lithium. BHP (ASX:BHP) is out because it has multi-billion dollars in losses on its Nickel West business in WA. Glencore has gone deeper into coal with the US$6.9 billion purchase of Teck Resources' coking coal mines in Western Canada. Anglo American is slimming down, selling off coal in Australia and not taking on lithium.
Chinese majors would be buyers, but they have been locked out of expanding in Australia and Canada. Besides, they already have significant footholds in Australia through a stake in Pilbara Minerals (ASX:PLS) and the two joint ventures controlling the huge and still profitable Greenbushes mine in southern WA.
As well, there’s more established companies, such as SQM and the big Chilean lithium group, Albemarle. The latter is the global major, but it is still cutting costs and has abandoned expansion plans in Australia and China.
Global Number 2, SQM, has big losses on its Azure Minerals play in WA with Hancock Prospecting, as well as more than $1 billion invested with Wesfarmers (ASX:WES) (for a similar amount) in the Mount Holland mine and associated refinery near Kwinana.
SQM is retreating to Chile by looking to shuffle its international assets into a separate company next year. It is moving closer to de facto government dominance in Chile (along with Albemarle’s operations in Chile).
All have spent billions of dollars in building positions in lithium, and these are investments that will not pay off for years to come, while putting pressure on corporate balance sheets for years to come.
Just three days after confirming it had approached Arcadium with a non-binding offer, Rio sealed an all-cash deal to acquire the New York-listed miner and lithium processor.
That speed tells us just how fraught the finances of the sector are.
Rio will probably run a big placement or some sort of quasi debt issue to replace the cash outlay. At 30 June, the company had net debt of US$5.1 billion and cash of US$9.7 billion, meaning its total debt was close to US$15 billion.
Mergers involving the likes of Mineral Resources (ASX:MIN) and Hancock Prospecting (the two billionaires, Chris Ellison and Gina Rinehart) are close. So far, the Kerry Stokes empire has stayed on the sidelines, preferring to make money from supply diggers, scrapers etc, while the future of Wesfarmers’ lithium adventure will have to be sorted out.
Australian Super seems to have put a foot on Pilbara Minerals by lifting its shareholding to 10.9% since July. That will be hard to shift except at a very high price, and the chances of that look few and far between.
Brokers, banks and analysts promoting takeover activity in the sector will be whistling in the dark for years to come as they sort through a long list of vendors and a tiny list of possible buyers – but only at knockdown prices.
