The pending US$6.7 billion takeover of US-based Arcadium Lithium (NYSE: ALTM) by big miner Rio Tinto (ASX: RIO) took a step closer to its expected June completion after the U.S. regulator gave the deal the thumbs up yesterday.
Arcadium’s share price rallied 8% overnight (on the New York Stock Exchange) to US$5.70.
While shareholders in both companies voted in favour of the cash offer last month, there are still some obstacles to clear. Given that the deal remains non-binding and awaiting approvals in Australia, Canada and Italy, local investors were less excited by the news with Rio Tinto trading flat at $115.92 heading into lunch today.
Buyers aren’t convinced
Instead of seeing recent dips in Rio’s price as a buying opportunity, investors appear to be pulling back. This is reflecting consolidation within a long-term downtrend. Based on Commsec analysis, Rio is below its 20-day simple moving average. This bearish sign is even more significant with the moving average also trending lower.
Also clearly on investors' minds are the current economic headwinds confronting big miners. Despite some attractive valuation metrics surfacing within the mining sector, institutional investors remain on the sidelines.
They want increased transparency on many fronts. These include clarity on US tariffs, the impact of a historically low A$/US$, and what an incoming Trump Administration means for capital markets globally.
There are also concerns about stimulus measures to boost China’s GDP growth which is forecast to slow to 4.2% this year.
This explains why the S&P/ASX 200 Materials Index remains out of the money, down around 13% over 12 months. Likewise, with a handful of Rio’s cohorts comprising a fifth of the main board, the ASX200 is weighed down by some tough love being handed out to the mining sector.
Long-term supply bets
Admittedly, Arcadium’s Olaroz asset in Argentina will add to Rio’s lithium production – recently boosted by the $2.5 billion expansion of the Rincon project in Argentina. However, investors remain wary of Rio’s plans to invest over $20 billion to create its growth and earnings division for lithium.
Like its junior counterpart, Patriot Battery Metals, Rio is placing long-term bets on growing sales of electric vehicles (EVs) helping to correct the current surplus which saw the lithium price tank.
Added to weaker-than-expected EV sales in 2024 were strong supply flows from new mines. Compounding those concerns were revelations yesterday from China’s Ministry of Natural Resources that the country's lithium reserves have increased from 6% to 16.5% of the global total. This propels it from sixth to second place in the world rankings.
Also on the minds of investors - reluctant to jump back into big miners – is how much of the lithium inventory will end up being stockpiled globally. Here in Australia, IGO (ASX: IGO) recently admitted to struggling to find buyers for the lithium hydroxide it produces at the Kwinana refinery south of Perth.
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