Rio Tinto is not doing a lithium business

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Buying near the bottom of the market should mean a bargain. Rio Tinto is buying Arcadium Lithium at a time when slowing demand for electric vehicles is destroying the price of lithium used in batteries. The price of lithium carbonate is down more than 80% from its peak. Yet for all Rio chief executive Jakob Stausholm’s talk of countercyclical moves, the $6.7 billion price tag for Arcadium is hardly a steal.

Rio knows all too well the dangers of buying at the top of the market. Memories of the disastrous $38 billion takeover of Canadian aluminum group Alcan in 2007 – right at the top of the aluminum market – still linger. Arcadium is the biggest acquisition since then. This time, Rio is betting that the painful lithium supply glut will reverse by the end of the decade.

Rio already has a lithium scheme close to production: Rincon in Argentina. Another proposed project in Serbia has been hit by protests. Arcadium would contribute to the immediate annual production of about 75,000 tonnes of lithium carbonate equivalent – its current production is in Argentina and Australia – but has expansion plans to double capacity by the end of 2028.

Rio argues that even when the market is oversupplied, Arcadium’s lower-cost production should protect it. In the second quarter, it had an adjusted ebitda margin of 39%, despite unfavorable market conditions.

But even if you set aside the fact that not all miners share this bullish view of lithium, Rio is paying a full price for Arcadium.

The offer price of $5.85 per share is more than double Arcadium’s three-month average share price before the talks were confirmed on Monday. Sure enough, Arcadium’s share price is down nearly 40% this year. But using Visible Alpha’s 2024 revenue estimates, the enterprise value/Ebitda multiple also looks rich at around 18x. US-listed Albemarle, the world’s biggest producer, trades at just under 15 times.

True, Rio would have struggled to lowball Arcadium. The deal requires the approval of 75% of the latter’s shareholders. An Arcadium investor has already said it will vote against the deal and is seeking closer to $8 billion.

But the extreme volatility of lithium prices in recent years reflects uncertainty about how the global electric vehicle market will play out. Several global automakers have scaled back their plans for electric vehicles.

Seventeen years on from Alcan, Rio may not be buying at the top of the market. But the most important rollout of the M&A dice since then looks like a risky one.

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