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[SINGAPORE] Rio Tinto is getting distracted by a shiny new thing. The Anglo-Australian mining giant may be on the verge of buying a stake in US$15 billion lithium producer Sociedad Quimica y Minera (SQM). After previously chasing aluminium at its peak, Rio is looking late again.
Excavators are emerging from a period of austerity. They have cleaned up a string of disastrous deals and slashed costs. Thanks to China and the surge of interest in electric cars, demand is growing. Materials including lithium, cobalt and copper are in vogue.
That helps justify a potential investment in SQM. It mercifully isn't a blockbuster along the lines of Rio's US$38 billion takeover of Alcan in 2007. What's more, the commodity in question is on the rise. It's also one to which Rio has limited exposure.
This would nevertheless be Rio's first major deal since 2011 and its first under chief executive Jean-Sébastien Jacques. What Rio chooses to buy now sends a potent signal for the company, and perhaps even the industry.
In that sense, the transaction would be worrisome. Rio will not have control, if it's part of a consortium purchasing a 32 per cent stake in SQM from Potash Corp of Saskatchewan, as Reuters is reporting. There are few if any synergies. Prices for lithium, specifically battery-grade carbonate, have spiked over the last two years. They should ease as more supply becomes available.
SQM's valuation also has roughly doubled this year. It fetches 30 times expected earnings for the next 12 months. Lithium users such as Apple and Panasonic trade at half as much. Rio's own multiple is just 11 times.
Ultimately, the bet could be that SQM's competition will be limited. Lithium projects are difficult to build and scale, even if the element is not rare. UBS, however, estimates current Ebitda (earnings before interest, taxes, depreciation and amortisation) margins for brine and mineral concentrate producers can reach 70 per cent. At that rate, more investment is almost inevitable.
The cost of entry is high, though. That might make less of a difference for other potential suitors. China, for example, is encouraging the deployment of capital on both batteries and their ingredients. For Rio, the financial logic is less clear.
Rio Tinto, Canada's Wealth Minerals and Chinese private equity firm GSR Capital are considering a bid for a stake in Chilean lithium producer Sociedad Quimica Y Minera, Reuters reported on Nov 21, citing unnamed banking sources.
The companies are considering buying a 32 per cent stake that Canada's Potash Corporation of Saskatchewan must divest as part of its merger with rival Agrium.