Rio Tinto’s Bargain Hunt

Hey Superheroes,

It’s a busy week of macroeconomic news. 

The Reserve Bank of New Zealand cut rates for the second time this year, bringing the NZ cash rate from 5.25% to 4.75%. The U.S. saw inflation for September fall to 2.4% (from 2.5% in August), marking the third consecutive month of cooling inflation. 

Meanwhile, China is set to release its latest fiscal support measures tomorrow (12 October). This follows the stimulus package the PBoC released two weeks ago that mainly focused on monetary policy changes. Chinese stocks and ASX iron ore miners rallied after that announcement.

Let’s take a look at this week’s biggest market mover.

Is Rio Tinto timing the market?

Lithium miners might’ve been ASX darlings in 2022 and 2023, but it looks like the same can’t be said for this year.

Lithium prices have fallen by over 50% since October 2023. Stocks of companies tied to commodities tend to follow the price trends of their underlying commodity, which may explain why many lithium miners have also seen falling share prices this year.

While this lacklustre performance might have disappointed some investors, for Rio Tinto, it seems to scream opportunity.

📝 Arcadium Lithium: The Story

A few days ago, both Rio Tinto and Arcadium Lithium went into a trading halt pending a big announcement.

Arcadium Lithium – the brainchild of the A$14.3 billion merger between ASX-listed Allkem and NYSE-listed Livent earlier this year – had seen its share price drop by as much as 67% since it began trading as a dual-listed company last January. At its lowest, it recorded a market cap of just ~A$3.5 billion, a far cry from the market value it commanded at the time of the merger.

The slump in share price came alongside consecutive quarters of lacklustre revenues and profitability. Despite much higher sales volumes, the lower lithium prices saw revenues remain largely the same. Coupled with inflated costs, Arcadium Lithium’s results failed to impress investors

⛏️ Rio Tinto comes to save the day?

This is where Rio Tinto comes in.

Last Wednesday, the two miners shared big news: Rio Tinto has put in a A$9.9 billion offer to fully acquire Arcadium Lithium in cash. 

To those watching from afar, it was a generous offer. After all, Rio Tinto was offering a 90% premium to Arcadium’s closing market cap last Friday.   

But to those who’ve held Arcadium shares since the beginning, it would’ve been disappointing. The offer was over 30% lower than what the Allkem-Livent merger was worth.

Despite that, Arcadium’s directors all voted in support of the takeover. 

🎢 Cyclical industry

While they didn’t specifically state their reasons, some believe it may be due to the offer being: 1.) a 90% premium, and 2.) all in cash.

Additionally, it’s a widely held belief that the mining industry is inherently cyclical. The economics behind how commodity supply and demand works have historically led to booms and busts within sectors of the mining industry.

Lithium prices saw a massive boom two years ago and now looks to be going through its “bust” stage. Just like how past performance doesn’t guarantee future performance, only time will tell whether and/or when lithium gets back to its previous highs.

Either way, estimates state Arcadium Lithium currently produces ~5% of the world’s lithium. 

📝 Attention to shareholders

As per Rio Tinto’s release, Arcadium Lithium’s shareholders may soon be receiving some paperwork with voting rights. At least 75% of voting rights have to be in favour for the transaction to proceed.

Meanwhile, it seems like Rio Tinto’s CEO may be considering an equity raise to help fund its shopping spree…

🔦  Some other things we’re shining the Spotlight on:

• DRIVERLESS TAXI: Tesla’s event “We, Robot” on Thursday unveiled its Cybercab, a fully autonomous vehicle. The Cybercab stems from Elon Musk’s long-held vision of revolutionising the taxi industry by innovating taxis that operate without drivers. Despite many critics around the safety of driverless cars, Musk himself is confident that Cybercab “will be one for the history books.”
• NOVONIX’S UK BREAKTHROUGH: Shares of battery materials and technology company Novonix (ASX: NVX) have risen 3.5% to 73 cents after the company announced a new partnership with ICoNiChem Widnes. This news has sparked investors’ interest on Wednesday morning, driving up the share price.
• APPEN’S AI VISION: Appen is raising $55 million to explore opportunities in generative AI, which has been driving improvements in its external customer environment. The company’s data services business has struggled to recover after the termination of a key contract with Google, with revenue down 12.9% in Q3.

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