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Albemarle/Liontown: US lithium producer willing to pay up down under

If the chemical group’s bid for the Australian company goes ahead, it will be one of the biggest lithium mining deals to date

China’s rapid buildout of electric vehicle battery capacity could itself run out of energy. Capacity will be twice this year’s demand, according to commodity research group CRU. That finding suggests demand for lithium will be more muted than anticipated by bulls. These include US chemicals group Albemarle.

The world’s leading lithium producer is closing in on an all-cash deal for Australia’s Liontown Resources. This is worth A$3 per share or A$6.6bn ($4.3bn) in total. Despite weak spot lithium prices, down 61 per cent this year, Albemarle still had to pay up. Its previous offer in March was A$2.50.

Liontown will now open its books. Albemarle wants Kathleen Valley, the fifth largest hard rock lithium resource in Australia with 5.4mn tonnes. Australia matters to the US producer. It already has large stakes in the first and third largest mines there.

The resource-dependent nation welcomes US lithium investment to balance Chinese interest. In July Australia’s Treasury blocked a takeover by a China-linked shareholder of Alita, a lithium miner in administration.

Albemarle’s shares have done little for two years. Trailing one-year ebitda for its lithium division, which makes 88 per cent of group profits, has decelerated. Profit margins have slipped in recent quarters.

This deal would be the largest lithium mining deal announced to date, according to Dealogic data. But it would not add to cash flow before 2025. That puts the offer price at 16 times consensus ebitda for that year. Larger local rival Pilbara Resources, which is already profitable, trades at a third of that valuation.

Liontown’s shareholders should be pleased. Its own valuation back in late 2021 — when spot lithium prices were similar — put a A$4.2bn value on Kathleen Valley. Albemarle’s downstream lithium conversion plants are some 1,000km away by rail near Perth. A long Australian rail link is preferable to long-distance road links in developing countries such as Mali, as Liberum points out.

Albemarle has plenty of form in Australia. But given battery overcapacity in China, the chances of its stock price benefiting from this added production are slim.

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