What’s really behind Rio’s interest in lithium producer SQM?
The Anglo-Australian miner is among those looking at a 32% stake in Chilean group
Is Rio Tinto on the verge of buying into $15bn lithium producer Sociedad Química y Minera de Chile? That’s the question the mining industry is asking after a string of stories linking the Anglo-Australian group to a 32 per cent stake that’s been put up for sale.
PotashCorp of Saskatchewan is selling the holding, worth almost $5bn at current prices, to get regulatory approval for a merger with a rival. According to recent reports Rio is favourite to buy the stake
But is the miner really ready to loosen the purse strings and launch its biggest acquisition since the ill-fated takeover of Alcan in 2007?
It’s important to place Rio interest in context.
The miner has set up an internal unit tasked with identifying and investing in the minerals and resources the world we need in 10 to 15 years. It gave the business, called Rio Tinto Ventures and headed by a former Xstrata executive, a mandate to examine potential deals in commodities like lithium, a key material in rechargeable batteries.
By definition that means Rio is going to show up at more bidding processes — something the market and excitable reporters will have to get used to. But in the case of SQM there’s a very good reason to get involved in the auction for the Potash stake.
Rio is sitting on a large lithium deposit in Serbia called Jadar. The company needs every scrap of information about the still-obscure lithium market before its gives Jadar the green light and sinks hundreds of millions of dollars into the project.
As such, it would be negligent of Rio not to be involved in the sale process given that SQM — already one of the world’s biggest lithium producers — could flood the market with new supply if it settles a dispute with Chile’s economic development agency.
“Information in such a process would presumably give detailed insight into SQM as a company and its place within the global lithium industry, and therefore would be particularly pertinent to Rio’s own thinking around the Jadar project,” said Paul Gait, analyst at Bernstein Research, in a recent report.
But let’s assume that this is more than a fact-finding mission and that Rio Tinto Ventures wants to buy the stake in SQM. Would the deal ever be signed off by Rio’s board?
Well, Rio’s relatively new chief executive Jean Sebastien Jacques has said he’s prepared to make acquisitions but only if they are ‘”smart” buys — or deals that deliver shareholder value.
SQM doesn’t look to be one of them.
First, Rio would be buying a minority stake with no obvious path to gain full ownership, unless it could also strike a deal to buy the stake of Julio Ponce Lerou, the former son-in-law of the late Chilean dictator Augusto Pinochet.
Second, SQM is very expensive. Due to the hype around electric vehicles, its share price has almost doubled this year and SQM now trades on 30 times expected earnings. On top of that, it’s not clear that lithium will be a commodity in short supply even if electric vehicles go mainstream.
The smart thing for Rio to do is walk away from the SQM auction — but only after it has gathered as much market intelligence as it can. And that’s probably what the miner, which has a chequered history of dealmaking, will do.