Arcadium Lithium shares gain over 30% following news of Rio Tinto's interest in acquiring the company 📈

The acquisition would continue a trend of large bids in the mining sector 

Both companies have confirmed the start of talks on a potential acquisition

For now, there are no binding agreements between them 

Rio Tinto's bid is likely to offer a significant premium 

Arcadium Lithium (ALTM.US) stock price shot up more than 41% at the open, following confirmation of news that mining giant Rio Tinto (RIO.UK) is considaering acquiring the company. News of the potential talks surfaced as early as Friday, when Arcadium's stock price gained 10%. Although the companies have confirmed their willingness to enter talks, it is worth remembering that for the time being they are not bound by any agreements, hence the coming to fruition of the deal is not at all certain. 

Arcadium Lithium is one of the leading lithium mining and processing companies. Estimates indicate that the company currently accounts for 5% of the world's supply of the metal, and some analyses suggest that its share of the global market will increase to 6% by 2028. The company operates in Argentina, Canada and Western Australia, among other countries. 

Tough market conditions for lithium 

Lithium is one of the key metals of the future, given the energy transition, advancing global technological development and the growing market for electric vehicles. However, the metal's prices have been hit hard by the market environment in recent years. Demand for electric cars is clearly slowing down (particularly in Europe), translating into significant cuts in vehicle production plans for the coming years. Decisions by leading European automakers to cancel the opening of some new battery factories are intensifying the oversupply environment in the metal market. 

In addition, the high interest rate environment slows down the renewable sources of energy development process by limiting companies' investment opportunities, hence the strong pro-growth factor for metal prices remains reduced.

However, in the longer term, lithium prices appear to have the potential to rebound from their lows, and the onset of a cycle of interest rate cuts could support increased investment in the renewables market, which could help stimulate demand enough to pull the metal out of its current lows. It's impossible to give a clear indication of when prices will hit their lows, but the current decrease of the metal prices pulling down the valuations of producers and mining companies is creating an attractive environment to start acquiring companies at very attractive valuations. The increased M&A market movement for mining companies indicates that some companies and large investors are beginning to bet on prices getting closer to the bottom, thus looking for market opportunities. 

Lithium prices continue their downward trend, both m/m and y/y. Source: Bloomberg Finance L.P. 

Arcadium Lithium on Rio Tinto's target 

One such bid could be Rio Tinto's attempt to acquire Arcadium Lithium. For the mining giant, such a deal could fulfill its announced strategy of increasing exposure to the lithium market. Additionally, from a market perspective, Arcadium Lithium's current valuation seems very tempting. Fundamental value indicators prior to news of the potential acquisition indicated the company was trading at a P/BV of 0.5x, EV/Sales forward 4x, EV/EBITDA forward 10.2x. 

The market capitalization of $3.3 billion is well below the analyst consensus estimate of about $5.2 billion for the company. What's more, in the event of a desire for a takeover, Rio Tinto will most likely have to offer a corresponding premium, given the synergies that an Arcadium acquisition could offer it. Some valuations even point to a company value of $8.5 billion. 

Could the acquisition mean a win-win situation for both companies?

Arcadium Lithium has had to severely limit its projects and expansion for the time being due to the hard lithium market conditions. Due to the limited potential to finance projects on its own, the company's potential for growth at both market valuation and projected revenues is currently severely limited. However, by taking advantage of the opportunities offered by Rio Tinto, it is likely that the company will be able to develop its projects and expand its operations, thereby strengthening its position in the global lithium processing market. 

On the other hand, Rio Tinto may diversify its portfolio and increase its exposure to the lithium market as a result of the acquisition, as well as gain greater efficiencies from its existing businesses by, among other things, leveraging Arcadium Lithium's operations in Argentina to support the Rincon Lithium Project. 

Today's move on Arcadium Lithium's stock price does not exhaust the full potential for a stock price increase if the deal comes to fruition. The consensus valuation over the next 12 months is still 12% above the current price, and the likely premium could be even higher. However, it is worth noting that the scenario is still unconfirmed, and the failure of the deal to materialize could be associated with strong discounts on the company's shares. Source: xStation