A bit of over a decade in the past, Rio Tinto Group was reeling from the influence of disastrous investments. First, the bruising top-of-the-market buy of aluminum group Alcan Inc., after which the ill-conceived swoop for Mozambique-focused coal outfit Riversdale Mining Ltd. The commodities growth cooled, prime managers have been pushed out and writedowns piled up.
Article content material
(Bloomberg) — A bit of over a decade in the past, Rio Tinto Group was reeling from the influence of disastrous investments. First, the bruising top-of-the-market buy of aluminum group Alcan Inc., after which the ill-conceived swoop for Mozambique-focused coal outfit Riversdale Mining Ltd. The commodities growth cooled, prime managers have been pushed out and writedowns piled up.
Commercial 2
Article content material
Now — after billions in costs, value cuts, plus a number of chief executives and a number of false begins — the miner has returned to the M&A fray, asserting the agreed $6.7 billion acquisition of Arcadium Lithium Ltd. this week.
Modest by comparability with previous splurges, the all-cash deal is a big and long-awaited growth of Rio’s wager on lithium, a steel different diversified miners have stayed away from, nervous about geological abundance amongst different elements.
It additionally marks a transparent step again towards acquisitive progress.
“The event of the Arcadium acquisition was years within the making,” mentioned Kaan Peker, analyst with RBC Capital Markets LLC. “Finally, as we’ve seen over the course of the final couple of months, it was pushed by a cyclical bottoming of the lithium worth.”
The mining sector throughout the board is barely simply starting to shift its focus to growth and offers. For years after the final frenzy soured, shareholders demanded solely higher returns. However whereas rival BHP Group examined the waters since 2022, with the transfer for OZ Minerals Ltd. — and ultimately bid unsuccessfully for Anglo American Plc, earlier this yr — Rio has held again.
Article content material
Commercial 3
Article content material
Folks accustomed to the matter have lengthy pointed to cumbersome inner buildings and a conservative method from Chief Government Officer Jakob Stausholm, who was chief monetary officer till the 2020 ousting of his predecessor offered an surprising opening on the prime. Public feedback pointed away from offers.
However it’s additionally true that the miner struggled with a difficulty that has dogged different massive friends like BHP. When revenue comes overwhelmingly from huge iron ore mines, it’s arduous to seek out additions which can be profitable — and sizeable — sufficient to maneuver the needle. Copper is pricey and arduous to seek out. Power-transition pleasant metals like lithium, utilized in batteries, are usually smaller scale, with loads of worth within the processing and never simply extraction.
Even with China’s sputtering financial system, the revenue margin for Rio’s Pilbara iron ore operations was 67% within the first half of 2024.
Battery Guess
Rio has important further copper and iron manufacturing due from Oyu Tolgoi in Mongolia and Simandou in Guinea, respectively. Nonetheless, its reply to the query of the place new, greener progress will come from has been lithium.
Commercial 4
Article content material
The trail has not been clean. Efforts to put money into new supplies by personal equity-inspired unit Rio Ventures, beginning in 2017, went just about nowhere and makes an attempt to purchase into lithium heavyweight SQM round that point have been additionally thwarted. Initiatives too have stumbled, with Jadar in Serbia, Stausholm’s early wager, turning for a time into an area trigger celebre.
“There have been some folks in Rio that have been very disenchanted they didn’t purchase the stake in SQM. For those who look again at Rio in these days they weren’t actually prepared,” mentioned George Cheveley, portfolio supervisor at Ninety One UK Ltd.
“Since Jakob turned CEO, he has been fixing inner issues and tasks that have been caught. Operationally, we’ve seen them hit their targets. Now to be shifting into lithium and getting again to M&A is the apparent subsequent step. You may see him rebuilding the corporate again to the place it was.”
Rio accomplished its $825 million buy of the Rincon venture in Argentina in 2022, but it surely was the collapse of lithium costs for the reason that finish of that yr that opened up extra avenues for M&A, with many new suppliers struggling to remain afloat.
Commercial 5
Article content material
The second-largest miner has seized the chance, and buyers are cautiously welcoming a transfer that brings future manufacturing — Arcadium is projected to be the world’s third-largest producer by 2030 — but in addition technological nous, notably in direct lithium extraction, or DLE, which might turbocharge output.
“We’re pleased Rio’s CEO Jakob Stausholm confirmed self-discipline and waited for the correct time; makes a whole lot of sense and Arcadium is a pleasant add-on,” mentioned Matthew Haupt, a portfolio supervisor at Wilson Asset Administration Ltd. in Sydney, who holds each Rio and Arcadium.
Others echoed the sentiment — even with a premium to the undisturbed worth of 90%, hefty regardless of the halving of Arcadium shares this yr.
“You may virtually say it’s akin to what BHP did final yr once they purchased OZ Minerals. Go on the market, do a deal that could be a small proportion of your market cap, execute it and show which you could purchase properly,” mentioned Barrenjoey analyst Glyn Lawcock. “The query now could be whether or not there’s extra to return down the pipe after this.”
Nonetheless, Rio has work to do in terms of convincing all its buyers that it’s able to get again to spending.
“In the event that they bask in massive scale M&A, it’ll be a damaging factor,” mentioned Prasad Patkar at Platypus Asset Administration. “I’m a bit of bit extra comfy with this transaction than I’d’ve been with something bigger. Or any top-of-the-market stuff.”
A Rio spokesman pointed to Stausholm’s feedback this week committing to stay disciplined in capital allocation, however declined to remark additional.
—With help from Sybilla Gross and Jack Farchy.
Article content material