Rio Tinto to buy Arcadia Lithium for $6.7bn

Rio Tinto said it had struck a deal to buy Arcadium Lithium for $6.7bn, making it a major producer of a key component of electric vehicle batteries.

The Anglo-Australian mining giant on Wednesday said it was offering $5.85 a share in cash - a 90% premium to the stock’s closing price at the end of last week.

Rio will now have access to lithium mines, processing facilities and deposits in Argentina, Australia, Canada and the US. However, the price of the commodity has been falling due to a slowdown in electric vehicle sales and oversupply from China.

"Acquiring Arcadium Lithium is a significant step forward in Rio Tinto's long-term strategy, creating a world-class lithium business alongside our leading aluminium and copper operations to supply materials needed for the energy transition," said Rio Tinto chief executive Jakob Stausholm.

“This is a countercyclical expansion aligned with our disciplined capital allocation framework, increasing our exposure to a high-growth, attractive market at the right point in the cycle.”

Matt Britzman, senior equity analyst at Hargreaves Lansdown said the move was "a classic attempt to buy the dip for Rio, snapping up some high-quality lithium assets when spot prices are around 80% down on their highs".

"It’s a good time to shop for counter-cyclical assets, and this deal helps propel Rio’s lithium portfolio to new heights, with it already having exposure through its Rincon and Jadar projects."

"The price will be scrutinised, at a touch under 20% of where Arcadium was trading when the company was formed in January, it’s not quite a bargain, and investors in the commodity world tend to take a dim view of M&A at the best of times."

"Arcadium is currently free cash flow negative, due to low prices and high investment in new projects, so Rio will have some work to do if it wants to turn this into an accretive buy – and that won’t happen immediately.”

Reporting by Frank Prenesti for Sharecast.com