By Clara Denina and Melanie Burton
LONDON/MELBOURNE (Reuters) -Rio Tinto has agreed to buy U.S. based Arcadium Lithium for $6.7 billion, it said on Wednesday, a deal that will catapult it to become the world's third largest miner of the metal used in electric vehicle batteries.
Already the world's largest producer of iron ore, Rio is transforming itself into a processor of high end, low carbon raw materials essential for the energy transition. The market is currently oversupplied with lithium, but CEO Jakob Stausholm said Rio is confident that long-term demand will be strong.
Rio said it would pay $5.85 per share in cash for Arcadium, an almost 90% premium to its closing price of $3.08 per share on Oct. 4, the day Reuters exclusively reported a potential deal.
Rio's London-listed shares were down 0.4% by 1054 GMT. Shares in U.S.-listed Arcadium jumped around 40% on Monday, after the companies confirmed negotiations.
Rio would gain access to lithium mines, processing facilities and deposits in Argentina, Australia, Canada and the United States to fuel decades of growth, as well as customers that include Tesla (NASDAQ:TSLA), BMW and General Motors (NYSE:GM).
Lithium prices have floundered due to Chinese oversupply and a slowdown in electric vehicle sales, resulting in miners of the metal emerging as attractive takeover targets.
Rio's Stausholm told investors that by the end of the decade the company expects a shortfall in supply, with a more than 10% compound annual growth rate in demand through to 2040, boosted by electric vehicles and energy storage.
The current weak market was an opportunity to pick up top quality assets at the right price, Stausholm told Reuters.
"We really want battery-grade lithium, i.e. the processing as well. And then, of course, we like to be an operator, and if you take those criteria, you very quickly come to Arcadium," he said.
"The way you should think about it is kind of a reverse takeover. This is not a case about cutting costs. This is a case about building faster and better," he added.
The deal won't make a material difference to Rio's current capex plans of up to $10 billion in 2025 and 2026, Stausholm said.
GOING FOR GROWTH
The acquisition will make Rio the third largest producer of the battery-making metal after Albemarle and SQM.
Arcadium Chairman Peter Coleman said Rio would be able to bring its expertise in execution and a strong balance sheet to help develop Arcadium's assets.
"They are not capital constrained ... For us, we know that growth plans still relied on an improvement in price over the next two to three years, which is quite a significant improvement over where we are now," he told Reuters.
The Anglo-Australian miner intends to fold its existing lithium assets into the new business to ensure growth and keep Arcadium's staff. "Rio has indicated they're very keen to keep their expertise," he added.
Rio had been banking on its huge Jadar project in Serbia to supply much of Europe's lithium needs but that could take at least two years to secure permits and the miner is facing strong local opposition to its plans.
Arcadium's mix of active mines, lithium deposits filled with decades of supply, and some of the industry's most advanced processing facilities would complement Rio's output of copper, iron ore and other critical minerals.
Rio's balance sheet could easily fund growth without straining the miner's existing operations, investors and analysts said. Rio's market capitalisation is $112.4 billion.
Arcadium shares have fallen more than 37% since the start of the year, giving it a market capitalisation of $4.56 billion.
Jason Beddow, managing director at Australian fund manager Argo Investments, which owns shares in Rio, said the deal made a lot of sense.
"Yes it's a big premium but stocks have been sold off a lot," he said.
Beddow, who visited the companies' Canadian operations in recent weeks said: "They are both close together geographically, they both use Quebec hydropower. Rio has a strong chemicals business in Canada that this will slot into."
The deal is expected to close in mid-2025. It has been a lot smoother than those of some of its rivals.
Peer BHP Group walked away from its $49 billion plan to take over rival Anglo American (LON:AAL), earlier this year following three rejected proposals.
BHP was barred from making another offer for Anglo by UK competition regulators, until late November.