The Rio Tinto Ltd (ASX: RIO) share price is on watch after announcing a deal to buy Arcadium Lithium CDI (ASX: LTM).
Rio Tinto is a major iron ore, copper and aluminium producer. Arcadium Lithium is one of the largest lithium miners in the world, with facilities and projects in Argentina, Australia, Canada, China, Japan, the UK and the US.
Rio Tinto and Arcadium Lithium deal agreed
After the ASX closed yesterday, Rio Tinto and Arcadium Lithium announced they had agreed to a transaction where Rio Tinto will buy the ASX lithium share business in an all-cash transaction for US$5.85 per share.
Rio Tinto said the takeover price represented a premium of 90% to Arcadium’s closing price of $3.08 per share on 4 October 2024 and a 39% premium to the average Arcadium Lithium share price since it was created on 4 January 2024.
This offer values Arcadium’s share capital at approximately $6.7 billion, according to Rio Tinto.
The transaction has been unanimously approved by the boards of both miners and is expected to close in mid-2025.
Why does this deal make sense?
Rio Tinto said buying this complementary lithium business will establish “a global leader in energy transition commodities – from aluminium and copper to high-grade iron ore and lithium”.
The ASX lithium share was attractive because of its fast-growing, vertically integrated asset base of long-life, low-cost operations and growth projects.
Rio Tinto noted that Arcadium’s current annual lithium production capacity across a range of products including lithium hydroxide and lithium carbonate is 75,000 tonnes of equivalent lithium carbonate, with expansion plans in place to more than double capacity by the end of 2028.
The iron ore miner is expecting higher profit generation and free cashflow “in the outer years”, before anticipated synergies.
Rio Tinto said it’s confident in the long-term outlook for lithium, with an expected compound annual growth rate for lithium of more than 10% through to 2040, leading to a supply deficit. The lithium price is down more than 80% compared to the peak price, so the ASX mining share is calling this a “counter-cyclical” acquisition with substantial long-term market and portfolio upside.
Management commentary
The Rio Tinto CEO Jakob Stausholm said:
Acquiring Arcadium Lithium is a significant step forward in Rio Tinto’s long term strategy, creating a world-class lithium business alongside our leading aluminium and copper operations to supply materials needed for the energy transition.
Arcadium Lithium is an outstanding business today and we will bring our scale, development capabilities and financial strength to realise the full potential of its Tier 1 portfolio. This is a counter-cyclical expansion aligned with our disciplined capital allocation framework, increasing our exposure to a high-growth, attractive market at the right point in the cycle.
We look forward to building on Arcadium Lithium’s contributions to the countries and communities where it operates, drawing on the strong presence we already have in these regions. Our team has deep conviction in the long term value that combining our offerings will deliver to all stakeholders.
Final thoughts on the Rio Tinto share price
This is a bold move by Rio Tinto, hopefully it pays off for the miner. While lithium demand is expected to rise, there is also a question in my mind of what happens with supply from other regions such as Africa.
It’s good to have diversification in the commodity portfolio, but Rio Tinto has had to pay a big premium to get this deal over the line.
The Rio Tinto share price isn’t as cheap as it was before the Chinese stimulus was announced, but it has noticeably dropped in the last 10 days. I’d prefer to buy at an even lower value, but there’s no guarantee it will drop as low as it did in September.
Other ASX dividend shares may be more attractive for investors wanting less volatility.
