Modest by comparability with previous splurges, the all-cash deal is a big and long-awaited growth of Rio’s wager on lithium, a steel different diversified miners have stayed away from, apprehensive about geological abundance amongst different elements.
It additionally marks a transparent step again towards acquisitive development.
“The event of the Arcadium acquisition was years within the making,” mentioned Kaan Peker, analyst with RBC Capital Markets LLC. “Ultimately, as we’ve seen over the course of the final couple of months, it was pushed by a cyclical bottoming of the lithium worth.”
The mining sector throughout the board is barely simply starting to shift its focus to growth and offers. For years after the final frenzy soured, shareholders demanded solely higher returns. However whereas rival BHP Group examined the waters since 2022, with the transfer for OZ Minerals Ltd. — and ultimately bid unsuccessfully for Anglo American Plc, earlier this yr — Rio has held again.
Individuals acquainted with the matter have lengthy pointed to cumbersome inner buildings and a conservative method from chief government officer Jakob Stausholm, who was chief monetary officer till the 2020 ousting of his predecessor offered an sudden opening on the high. Public feedback pointed away from offers.
However it’s additionally true that the miner struggled with a difficulty that has dogged different massive friends like BHP. When revenue comes overwhelmingly from huge iron ore mines, it’s exhausting to search out additions which can be profitable — and sizeable — sufficient to maneuver the needle. Copper is dear and exhausting to search out. Power-transition pleasant metals like lithium, utilized in batteries, are usually smaller scale, with loads of worth within the processing and never simply extraction.
Even with China’s sputtering economic system, the revenue margin for Rio’s Pilbara iron ore operations was 67% within the first half of 2024.
Battery wager
Rio has vital extra copper and iron manufacturing due from Oyu Tolgoi in Mongolia and Simandou in Guinea, respectively. Nonetheless, its reply to the query of the place new, greener development will come from has been lithium.
The trail has not been easy. Efforts to spend money on new supplies by personal equity-inspired unit Rio Ventures, beginning in 2017, went nearly nowhere and makes an attempt to purchase into lithium heavyweight SQM round that point had been additionally thwarted. Tasks too have stumbled, with Jadar in Serbia, Stausholm’s early wager, turning for a time into a neighborhood trigger celebre.
“There have been some folks in Rio that had been very disillusioned they didn’t purchase the stake in SQM. Should you look again at Rio in these days they weren’t actually prepared,” mentioned George Cheveley, portfolio supervisor at Ninety One UK Ltd.
“Since Jakob grew to become CEO, he has been fixing inner issues and initiatives that had been caught. Operationally, we’ve seen them hit their targets. Now to be transferring into lithium and getting again to M&A is the plain subsequent step. You’ll be able to see him rebuilding the corporate again to the place it was.”
Rio accomplished its $825 million buy of the Rincon challenge in Argentina in 2022, however it was the collapse of lithium costs for the reason that finish of that yr that opened up extra avenues for M&A, with many new suppliers struggling to remain afloat.
The second-largest miner has seized the chance, and traders are cautiously welcoming a transfer that brings future manufacturing — Arcadium is projected to be the world’s third-largest producer by 2030 — but in addition technological nous, notably in direct lithium extraction, or DLE, which might turbocharge output.
“We’re comfortable Rio’s CEO Jakob Stausholm confirmed self-discipline and waited for the fitting time; makes plenty of sense and Arcadium is a pleasant add-on,” mentioned Matthew Haupt, a portfolio supervisor at Wilson Asset Administration Ltd. in Sydney, who holds each Rio and Arcadium.
Others echoed the sentiment — even with a premium to the undisturbed worth of 90%, hefty regardless of the halving of Arcadium shares this yr.
“You possibly can virtually say it’s akin to what BHP did final yr once they purchased OZ Minerals. Go on the market, do a deal that may be a small share of your market cap, execute it and show that you may purchase effectively,” mentioned Barrenjoey analyst Glyn Lawcock. “The query now’s whether or not there’s extra to come back down the pipe after this.”
Nonetheless, Rio has work to do in terms of convincing all its traders that it’s able to get again to spending.
“In the event that they take pleasure in massive scale M&A, it’ll be a damaging factor,” mentioned Prasad Patkar at Platypus Asset Administration. “I’m a bit bit extra comfy with this transaction than I might’ve been with something bigger. Or any top-of-the-market stuff.”
A Rio spokesman pointed to Stausholm’s feedback this week committing to stay disciplined in capital allocation, however declined to remark additional.
(By Paul-Alain Hunt)