Neometals (ASX:NMT) non-binding memorandum of understanding (MoU) with Rio Tinto (ASX:RIO) could generate royalties of around $7 million annually for every 40,000 tonnes of lithium hydroxide produced, if the collaboration progresses to a commercial agreement, according to a Friday note by Euroz Hartleys.

On Wednesday, the company, along with Mineral Resources (ASX:MIN) said their joint venture company, Reed Advanced Materials, signed an MoU with Rio to evaluate the explore the use of RAM's ELi process technology.

With Rio's long-term lithium production ambitions, the deal could be a "huge company maker" for Neometals, as royalty-based firms typically trade at high price-to-earnings multiples, Euroz said.

A higher royalty rate or a rebound in lithium prices could further boost returns, Euroz noted, adding that the key lies in the ELi process cutting lithium production costs.

Euroz maintained the company's speculative buy rating and its AU$0.15 price target.

Shares of Neometals and Mineral Resources fell 4% and 2% respectively, while shares of Rio rose 5% in recent Friday trade.