Rio Tinto expands lithium bet with biggest deal since 2007

Rio Tinto Group has agreed to buy Arcadium Lithium Plc in an all-cash deal valuing the US-listed miner at US$6.7 billion, expanding its grip on the battery metal and stepping back into the M&A fray with its biggest deal in 17 years.

Rio will pay US$5.85 per Arcadium share, a 90-percent premium to the target’s closing price on October 4 — before Rio first confirmed that it had made an approach. Arcadium jumped as much as 31 percent to US$5.56 in early New York trading on Wednesday.

Major miners have been returning to acquisitions but with caution, given poorly timed and ill-conceived deals during the last commodities boom that left companies and shareholders to deal with painful writedowns.

Rio has been even more tentative than its heavyweight peers like BHP Group, which made an offer for Anglo American Plc earlier this year. Rebuffed, BHP eventually walked away.

“The reality is that Rio really hasn’t grown in a decade, but now we’re back,” Rio Chief Executive Officer Jakob Stausholm said in a phone interview.

The only large diversified miner to bet heavily on lithium, Rio is swooping for Arcadium at a time when an oversupply of the metal and cooler electric-vehicle sales has battered producer stocks, despite the potential for growth as the energy transition takes hold. The spot price for lithium carbonate in China is down more than 85% from a peak in 2022.

The deal provides “a new segment in the portfolio that differentiates Rio from the likes of BHP,” said Dawid Heyl, a portfolio manager at Ninety One, which has a 0.3-percent stake in Rio Tinto. 

The miner began more seriously considering options at the start of the year, looking at “basically all of the lithium projects around the world,” Stausholm said.

“It was a huge piece of work, but what became very clear to us was we would like to have exposure to brines,” he said, adding Arcadium produces battery-grade lithium from direct extraction, a new technology that removes the need for expensive downstream processing plants. 

For Rio, which has faced activist opposition at its yet-to-be-developed Jadar lithium mine in Serbia, Arcadium provides a rapid output boost.

‘Fair price’

Investors in the acquired producer, formed at the start of this year with the merger of Allkem Ltd and Livent Corp, had publicly expressed concerns that Rio would seek a bargain, given the stock roughly halved in 2024. One investor, Blackwattle Investment Partners, said in a letter to the board that “the timing of this potential sale could not be at a more value destructive period for shareholders.”

Arcadium Chairman Peter Coleman the deal should help fund brine and hard-rock lithium projects in China, Argentina, Canada and Australia, even in difficult markets.

He wrote in a letter that “by accepting this proposed transaction from a larger, more diversified player, shareholders can avoid these risks as well as potential delays or setbacks in project execution, in exchange for immediate returns.”

For Rio, with a market capitalisation of US$112 billion, Arcadium is seen as a bolt-on deal. It’s still a test of the miner’s deal-making mettle in a new era of constrained spending, as the biggest acquisition since Rio’s US$38-billion all-cash acquisition of Alcan Inc in 2007. That purchase, after a bidding war, ultimately left Rio with $29 billion of charges.

“Alcan, in hindsight, was bought at the top of the cycle,” Stausholm said. “We feel quite comfortable that we have not bought a lithium company at the top of the cycle right now. We had to pay a fair price, and that’s what we’re paying.”