Rio Tinto Plc is muscling in on the lithium market after a precipitous price collapse for the battery metal, betting it can build a portfolio of massive, low-cost mines that will outlast weaker rivals.
The miner has been looking to build a lithium business for years, and its planned US$6.7-billion takeover of Arcadium Lithium Plc will immediately establish it as one of the world’s top suppliers. The company is planning to invest heavily in further expansion ahead of an anticipated demand boom in the 2030s.
However, as he outlined the rationale for the deal on Wednesday, Rio CEO Jakob Stausholm stressed he is not necessarily betting that lithium prices are heading back to the sky-high levels seen when electric vehicle sales took off in recent years. Rather, in an environment where low prices are forcing some suppliers to shut down, the appeal lies in the fact that Arcadium is one of the lowest-cost producers in the world.
Rio’s focus on large-scale, low-cost mining has proven hugely successful in larger markets like iron ore. That business has reliably pumped billions of dollars in profit for Rio shareholders even during weak prices and oversupply periods. Those conditions tend to flush smaller, higher-cost producers out of the market, leaving Rio to reap the rewards when prices rebound.
“One thing that is very important — that’s the mantra of Rio Tinto through decades — is we believe in the cost curve,” Stausholm said. “I do think it’s going to be very difficult to project the lithium price, but if you think about it, the lower it goes in the next short period of time, the higher it will have to go later on.”
An ongoing price slump has seen lithium producers curtail output, suspend expansion projects, and rein in capital expenditures. Analysts expect the market to remain in a surplus for the next couple of years, and this bearish sentiment is also weighing on the stock prices of producers such as Arcadium and Albemarle Corp.
According to a team of Citigroup Inc. analysts, including Paul McTaggart and Kate McCutcheon, the acquisition will make Rio the number two lithium producer with the largest resource base.
Arcadium’s attraction for Rio also lies in its chemical expertise. According to Citigroup, the former is one of the few global players with the capabilities to produce battery-grade lithium products used in EVs. It is also one of just two lithium-hydroxide producers in the United States.
The analysts wrote in an October 9 note that Arcadium’s exposure to three top-tier resources in Argentina is another attraction for Rio.
by Mark Burton & Yvonne Yue Li, Bloomberg
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