Lithium M&A News to Continue in 2023 as Consolidation Ramps Up
M&A has picked up pace in the lithium sector, with the recent US$10.6 billion deal between Livent (NYSE:LTHM) and Allkem (ASX:AKE,OTC Pink:OROCF) setting the stage for what might be ahead for the market.
This activity comes at a time when lithium demand is expected to increase significantly and scaling supply continues to face challenges.
Commenting on the Livent/Allkem news, Joe Lowry, president of Global Lithium, said it wasn’t a surprise.
When asked his thoughts on whether the deal is good for both companies, Rodney Hooper of RK Equity said Allkem earned more EBITDA than its 56 percent share of the merged company.
“But Allkem will also benefit from Livent’s downstream processing skills, while Livent secures feedstock for its downstream plants,” he said. “There are supposedly cost savings for the merged company — time will tell.” The combined company will have a more diversified production profile and will have more bargaining power with customers, Hooper added.
Livent, which was spun off from FMC in 2018, has been operating its lithium business in the Salar del Hombre Muerto in Argentina for more than 20 years. In Canada, Livent owns 50 percent of Nemaska Lithium, a fully integrated lithium hydroxide development project located in Quebec. Nemaska recently inked a lithium supply deal with its first customer — US carmaker Ford (NYSE:F).
Meanwhile, Allkem was formed two years ago after the AU$4 billion merger of Argentina-focused Orocobre and Australia’s Galaxy Resources. The industrial chemicals and minerals company operates in the Salar de Olaroz in Argentina, and it has been advancing plans to develop the Sal de Vida lithium brine and potash project in the same country.
Allkem also owns the Mount Cattlin mine in Western Australia, which is currently producing spodumene and tantalum concentrate, as well as the James Bay lithium pegmatite project in Canada.
“What the deal also likely does is decrease the amount of available spodumene concentrate for sale to third parties,” Hooper said. “This is positive for lithium prices down the road.”
Will the Livent/Allkem deal bring more lithium supply to market?
Bringing new lithium supply online is not an easy task as delays are common, with the real question being more often than not how late projects will be. But to meet the ambitious net-zero goals set by governments around the world, lithium supply will need to increase.
“In theory, the merged company will have higher free cashflow and will be able to focus its attention on the most profitable projects they own, which should result in an accelerated supply of chemicals,” Hooper said.
Meanwhile, Lowry doesn’t think there will be more lithium in the next five years because of this transaction.
“I think you have to take it step by step. I think it puts it in motion, but we’ll see how the integration of the two companies goes … they come from very different cultures,” said Lowry, who is also host of the Global Lithium Podcast.
Will lithium sector consolidation continue in 2023?
The Livent/Allkem merger has attracted attention recently, but other lithium M&A has also made headlines.
Earlier in 2023, top lithium producer Albemarle (NYSE:ALB) made a US$3.7 billion takeover offer for Australia’s Liontown Resources (ASX:LTR,OTC Pink:LINRF), although it was rejected. Another Australian company, Essential Metals (ASX:ESS,OTC Pink:PIONF), declined a bid from a joint venture formed by leading producers Tianqi Lithium (OTC Pink:TQLCF,SZSE:002466) and IGO (ASX:IGO,OTC Pink:IPGDF).
Hooper believes more M&A activity is ahead for the lithium sector in 2023 and beyond.
“Any large resource project in a Tier 1 jurisdiction will likely be bought out or merged,” he said. Despite the deals signed with junior miners in recent months, for the expert, original equipment manufacturers need to get more involved. “Offtake agreements are an insufficient hedge; they also need to lock in lower long-term lithium prices,’ Hooper added.
Lithium expert Lowry also expects more consolidation in the lithium space.
“I think you might see some of the better small exploration plays in Western Australia just get absorbed sooner than they would have otherwise, just because it’s a grab for the rock now,” he said. “Why wait until they have a market cap of $500 million If you can pick them off when they’ve got a market cap of $50 million?”
Tips for investors as lithium M&A heats up
Lithium investors have seen prices in China fall since November. According to Fastmarkets data, so far this year, prices are down roughly 60 percent on the back of increased supply, destocking dynamics, lower downstream demand and bearish sentiment.
For Lowry, it’s important to focus on what spodumene has been doing instead of just looking at China’s spot price.
“Spodumene sets the cost curve,” Lowry explained. “The narrative on lithium prices has been wrong for so long … I continue to maintain that the average price paid for lithium chemicals in 2023 will be higher than 2022, and the first four months of the year absolutely prove that.”
Shares of both Allkem and Livent rose after their merger was announced. With that in mind, how should investors react when they see new developments in the lithium industry?
“I think if you’ve got a core strategy that you’re confident in, anytime new information happens, look at what you’re doing investment wise in light of new information,” Lowry said. ‘But I don’t think most people need to (change their strategy).’
For his part, Hooper said investors should keep in mind that the lithium sector is seeing a clear divide between China and the rest of the world, including the US and Europe.
“The ex-China electric vehicle and energy storage systems markets are growing significantly, and now the US and Europe offer meaningful incentives to supply into their chains,” Hooper said. “The lithium sector will see deals happen that optimize the benefits (based on strict requirements) on offer from legislation in these regions that maximize profits.”
Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.