• Deal activity to continue to be driven by long-term demand
• Larger producers to secure better-quality projects
• Juniors to consolidate to attain critical mass

While the continuing decline of lithium prices hits daily news headlines, it does not seem to bother those looking to strike deals in the sector. Martín Pérez de Solay, managing director and CEO of Australian lithium producer Allkem [ASX:AKE], can attest to that.

Allkem is awaiting the scheme meeting to be held on 19 December for shareholders to vote on its proposed USD 10.6bn merger of equals with Livent [NYSE:LTHM], which needs at least 75% of votes supportive of the deal to succeed. “We have been talking (for the Allkem/Livent merger) for two years. We never refer to (lithium) price in our rationale,” de Solay told a conference in Sydney last month, who was onstage along with Livent President and CEO Paul Graves.

After reports emerged last month saying various shareholders were against the Allkem/Livent deal, the proposed merger won proxy support from advisor Glass Lewis, which said a fall in valuations for the two producers should not derail the deal and that there was a “natural fit” between Allkem’s extraction business and Livent’s large footprint in processing and refining.

It is a very short-term view to focus on day-to-day price movement, while the longer-term view is to work out how to capture the value in the growing demand for lithium, underpinned by the world’s decarbonization journey, said de Solay.

That value-capturing thesis will lead to continued M&A activity in the lithium space, super-charged by the US Inflation Reduction Act (IRA) signed in 2022 and similar legislation in Europe, as manufacturers try to diversify their supply chain out of China, according to analysts and deal advisors polled by Mergermarket.

Guy Alexander, partner at Allens who has advised on this year’s major lithium deals, said that lithium M&A activity will continue in coming years as car manufacturers and chemical companies want to put their foot on the supply of lithium.

Recent acquirers are taking a longer-term view of the lithium supply demand curve, while there is an expectation that the recent softening in spodumene pricing will recover in the next 12 months, which will underpin continued activity in this sector, said Oliver Carrick, partner at Corrs Chambers Westgarth.

The consolidation of the lithium industry will continue as larger producers look to acquire better-quality projects and junior companies merge to attain critical mass and potential synergies, according to a recent report titled “Lithium Projects Review” by RFC Ambrian, an Australian advisory and investment firm focusing on natural resources.

Only the start of deal momentum

Australia has seen USD 1.26bn worth of deals announced in the lithium sector so far this year, a huge jump from USD 56.4m in 2022. It has been the second highest year in lithium M&A for Australia, only eclipsed by the USD 1.44bn recorded in 2018, according to Mergermarket data. (The Allkem/Livent deal is not included in Australia’s deal count by Mergermarket because the target is based in the US.)

This is just the beginning, though, as the lithium industry is still relatively young, in comparison with other mining activities in Australia such as iron ore, of which the country is the world’s largest producer and exporter.

What Australia is heading with lithium is likely the same situation with iron ore, as Australia has some of the best, if not the best, lithium hard rock mines in the world, according to Allens’ Alexander. Mines like Greenbushes, owned by Tianqi Lithium [SHE:002466], IGO [ASX:IGO] and Albemarle Group [NYSE:ALB]; Kathleen Valley, 100% owned by Liontown Resources [ASX:LTR]; as well as Wodgina in the Pilbara region owned by Mineral Resources [ASX:MIN] and Albemarle are “absolutely world-class”, he noted.

In fact, Australia’s global supply dominance in lithium exceeds that of iron ore, with a 79% global share of hard rock mining – lithium spodumene – in 2021, Tim Buckley and Matt Pollard, two experts from Climate Energy Finance, an Australian think tank on accelerating decarbonization in line with climate science, argued in a report. Australia is only at the start of a globally significant investment boom in lithium, they noted.

The major diversified miners in Australia are yet to drive large scale M&A in the lithium sector, which provides further headroom for M&A in this sector, Corrs’ Carrick said.

International buyers vs domestic billionaires

International buyers, particularly American ones, feature heavily in Australia’s lithium deals this year, such as Albermarle [NYSE:ALB], Chile’s SQM [NYSE:SQM] and Corporación Nacional del Cobre de Chile (Codelco).

What has been unusual this year, though, is that a couple of large lithium takeovers by international buyers have been thwarted by two Western Australia-based billionaires: Hancock Prospecting’s Gina Rhinehart and Mineral Resources’ [ASX:MIN] Chris Ellison. These two have a history of working together on iron ore projects and seem to be collaborating now in lithium as well.

In October, global chemicals manufacturing business Albermarle [NYSE:ALB] abandoned a AUD 6.6bn takeover of Australian emerging batteries mineral producer Liontown Resources [ASX:LTR] after Hancock raised its stake to nearly 20%. Hancock is also working with Mineral Resources on deals involving Azure Minerals [ASX:AZS], which received a AUS 1.6bn takeover offer from Chile’s SQM [NYSE:SQM].

Apart from Azure, Mineral Resources also has positions in Delta Lithium [ASX:DL1] along with Hancock, as well as in Global Lithium [ASX:GL1]and Wildcat Resources [ASX:WC8]. Mineral Resources and Hancock could well be expected to get involved again in any future transactions and to continue mopping up the Australian lithium industry.

“Domestic bidders are able to close strategic investment in critical minerals industry without the need for foreign investment review board approval, which gives them a strategic advantage to move quickly on attractive targets,” Carrick from Corrs said, adding that those looking to invest need to understand the competitive dynamics for particular assets.

Just two weeks ago, Mineral Resources announced it will acquire Alita Resources Ltd’s Bald Hill lithium mine for AUD 260m including debt.

Quality projects in spotlight

Buyers are generally looking for projects that have been de-risked, in terms of risks around project development including permitting, environmental approval, traditional owners’ involvement, etc., but some projects are really high-class even though they are relatively early-stage, Allens’ Alexander said.

The “Lithium Projects Review” report by RFC Ambrian, having looked at 47 lithium projects globally at the development stage, came up with a ranked list of 21 high-profile projects that “show the most favourable characteristics from a potential takeover point of view”, although six of them are unlikely to be taken over due to their ownership structure.

The ranked list includes three Australia-based projects: Kathleen Valley, owned by Liontown, ranked second, Core Lithium’s [ASX:CXO] Finniss project ranked sixth, and Wesfarmers [ASX:WES] and SQM’s Mt Holland ranked seventh.

Based on the list, the report flagged eight ASX-listed companies that own projects in Australia or/and other jurisdictions likely to attract corporate interest: Liontown, Piedmont Lithium [ASX:PLL], Sayona Mining [ASX: SYA], Core Lithium, Latin Resources [ASX:LRS], Vulcan Energy [ASX:VUL], Lake Resources [ASX:LKE], and European Metals [ASX:EMH]. Prior to Albemarle’s bid for Liontown, this news service last September identified Liontown as one of the potential takeover targets.

“We believe these junior companies have the potential to be involved in some sort of corporate activity based on assessments of their projects,” the report noted.

Junior Australian lithium miners are expected to consolidate further in 2024, which will provide more takeover opportunities for buyers looking for a larger portfolio of assets, according to Phillip Hudak, Maple-Brown Abbott’s co-portfolio manager for Australian small companies.

“It also allows bidders to bring on broader technical lithium expertise and develop projects in a more cost-effective way in relation to capital management, as opposed to smaller, standalone companies,” he said.

Going forward, the big debate in Australia is to what degree Australia could have any form of downstream processing of lithium onshore to capture more margin in the entire value chain, Allens’ Alexander said.

“Those downstream processing facilities cost a lot more to build in Australia than in other parts of the world and will require massive investment,” he noted.