Rio Tinto is cementing itself in the lithium space with the $6.7 billion proposed acquisition of US-based chemical producer Arcadium Lithium.

The all-cash deal will see the Anglo-Australian mining giant pay $5.85 per share of Arcadium, a 90% premium to the company’s closing price of $3.08 per share on 4 October. Compared to the volume-weighted average price since Arcadium was created on 4 January, it represents a 39% premium.

Rio has long had ambitions to grow its exposure in lithium. In 2022, it completed the acquisition of the Rincon lithium project in Argentina, for which first pilot production is slated by year-end. 

In Serbia, the company is planning the $2.4 billion Jadar lithium project, which could potentially produce up to 58,000 t/y of lithium carbonate. The miner intends to file for an exploitation licence in December and is currently engaging with the public to try to change environmental concerns and perceptions about the project.

Even back in 2018, Rio was rumoured to attempt to buy a stake in SQM – the world’s second-largest lithium producer, says George Cheveley, co-portfolio manager of global natural resources strategy, at Ninety One.

“Rio sees lithium as a high-growth market with a lot of potential long-term – that has been their view for a number of years,” Cheveley tells Kallanish in an interview. “They were sat there with a bullish view on lithium, but actually no real exposure to lithium for probably at least five years until either of their projects got to scale.”

According to James Whiteside, head of corporate, metals & mining at Wood Mackenzie, the acquisition highlights the “buy versus build” dynamics currently playing out in the lithium sector. For Rio, the acquisition underlines Arcadium’s high earnings multiple and value relative to Rio’s organic development options. On the other hand, developing Rio’s existing lithium operations – Jadar and Rincon – comes with high capital intensity and long timelines. 

“The figures for capital intensity – what’s actually being deployed in Rincon – show that it’s very high,” Whiteside explains. “Developing a new DLE [direct lithium extraction] technology comes with a lot of investment in R&D and then development costs itself, so that’s part of the issue.”

Jefferies analysts add that with permitting challenges at the Jadar mine and the Rincon project still in development, the acquisition of Arcadium would give Rio 75,000 tonnes of current lithium carbonate equivalent (LCE) capacity.

By acquiring Arcadium, Cheveley notes, Rio is taking a “major step forward” in getting exposure to the market in operating assets. At the same time, the mining giant can tap into Arcadium’s skills, expertise, knowledge and know-how in the lithium sector.

“We have to remember that lithium – particularly in the Western world – is not a market where there’s a huge amount of skills, because it’s been a very small commodity… It’s only in the last 10 years it’s really grown with the rise of EVs and batteries,” he explains. “So there aren’t a lot of people out there with good knowledge of lithium processing. And Arcadium is one of the companies which does have that.”

More importantly, the acquisition gives Rio access to Arcadium’s expertise in DLE – a technology that can extract lithium from brine in a more sustainable and efficient way. Arcadium’s predecessor Livent was the first to develop an early version of DLE. It has been using the tech, in combination with evaporation ponds, at its Hombre Muerto project in Argentina for around three decades.

“Arcadium has existing DLE process that they’ve managed to integrate at one operation, and perhaps could apply to similar assets in that jurisdiction that they’re developing,” says Whiteside. “And they do have a great organic growth pipeline and the expertise to actually deliver that.”

Market downturn
Rio Tinto says the acquisition aligns with the company’s long-term strategy to strengthen its energy transition commodities portfolio, alongside aluminium and copper.

The takeover move is quite timely and opportunistic, following an over 80% decline in lithium price since the 2022 highs.

“Clearly, at this point, they saw an opportunity to buy one of the few companies with a broad range of assets and know-how, at a price which felt to them very doable because of the downturn,” says Cheveley.

Russ Mould, investment director at AJ Bell, says the mining giant took “advantage of the sharp slump in Arcadium’s share price in 2024” and didn’t play around.

“Rio Tinto paying a 90% bid premium for Arcadium shows it is serious about bolstering its exposure to lithium and it is prepared to dig deep to secure the assets,” Mould tells Kallanish. “There is none of the usual toe-in-the-water cheeky bid at an opportunistic price. Instead, Rio Tinto appears to have gone in with a serious offer, priced accordingly, in the hope that will be enough to get the deal done without any song and dance.”

Unsurprisingly, Rio is betting on lithium’s future demand and for the prices to go up.

“Clearly, they have a view, that [lithium] prices should be higher,” Cheveley says. “You can see nobody’s making money – Arcadium wasn’t making money. This is not a sustainable price. Now Rio, I’m sure, has a higher view of prices. How high? I don’t know, and I’m sure it’s quite conservative.”

“What they also have in Arcadium, is those brines they’re buying have some of the lowest cost production,” he continues. “So they would be still generating cash today and in the future, even if prices rise by not much… Their basic view is, ‘We don’t know what exactly the long-term price is going to be, but we should be able to operate in any scenario.’ And clearly, if they believe their DLE can lower that cost of production, then they’ll be even better placed.”

Sherif Andrawes, head of global natural resources and energy at BDO Australia, agrees: "There is a view that lithium prices will rebound in approximately five years. This is supported by Rio’s own analysis of the supply and demand forces in the lithium market."

"Few companies will be happy to hold a lithium development project or projects for this length of time, but a company the size of Rio with its large balance sheet has the ability to hold Arcadium’s lithium projects to the point where lithium prices recover," Andrawes adds.

Arcadium has upstream operations in Argentina, Australia and Canada, plus downstream conversion assets in the US, China, Japan and the UK. For the company, the deal is a means to unlock its vast project pipeline.

According to Cheveley, Arcadium was “struggling” on its balance sheet. While they had a lot of projects to develop, they needed to cut back their capex as they were not generating enough cash. “In a sense, they were in defensive mode, just surviving the downturn and unable to develop [the projects].” 

“The vast majority of Arcadium’s value, however, sits in its long-dated organic growth pipeline, which is expected to lead to LCE capacity of 170,000 t by 2028, and 295,000 t over the next decade,” analysts at Jefferies note. “Rio’s strong balance sheet and development capabilities can lead to the acceleration of this project delivery.” 

Urging its shareholders to approve the transaction, Arcadium’s chairman Peter Coleman told shareholders that accepting the transaction can help the company overcome the risks associated with developing and expanding lithium production.

What next

Some say the Rio Tinto-Arcadium deal may lead to consolidation and more mergers and acquisitions activity in the sector.

“I am sure that other companies will be running a ruler over smaller lithium companies, in particular those who are not yet producing,” says Andrawes. “We have seen Latin Resources in Brazil being similarly acquired by the larger Pilbara Minerals and the similar reasoning, albeit on a smaller scale holds there.”

However, Cheveley finds it hard to predict.

“Does it mean somebody has to buy Albemarle or some other big deal? It’s difficult to say, there are all sorts of reasons these things happen or don’t happen,” he adds, noting that any potential deals are likely to be at an asset level rather than at a company level.

“Like with all things, probably the first thing they want to do is take over Arcadium, integrate the people, probably tidy up the portfolio, and at the same, time see how Rincon performs and how Jadar goes,” Cheveley explains. “Then that might spur further actions, but I would say we’re probably a year or more away from that.” 

The transaction is subject to Arcadium shareholders’ approval and customary regulatory clearance. If all goes through, it is expected to close in mid-2025.