Rio Tinto Ltd (ASX: RIO) recently launched an ambitious takeover bid for Arcadium Lithium CDI (ASX: LTM), which raises some interesting questions about ASX lithium shares.
If a major player like Rio Tinto sees an opportunity with lithium stocks and is willing to pay a large premium for an ASX mining share, then it's probably worth considering whether the beaten-up sector is actually an opportunity for the long term.
As a reminder, Rio Tinto's offer of US$5.85 per share has been accepted. This represented a premium of 90% to Arcadium's closing price of $3.08 per share on 4 October 2024 and 39% to Arcadium's volume-weighted average price since it was created on 4 January 2024.
Rio Tinto said this takeover was a "counter-cyclical" expansion, increasing its exposure to a "high-growth, attractive market at the right point in the cycle".
Consequently, broker E&P Financial has suggested that ASX lithium shares are just one deal away from a resurgence, with a shrinking number of miners to invest in, according to reporting by the Australian Financial Review. The broker mentioned Pilbara Minerals Ltd (ASX: PLS) and Liontown Resources Ltd (ASX: LTR) as opportunities.
E&P Financial said that Rio Tinto's Arcadium Lithium deal could spark institutional investment in ASX lithium shares if investors speculate on the next takeover target.
The AFR quoted E&P financial analyst Adam Martin, who said in a note to clients:
Rio's acquisition of Arcadium feels like bottom of the cycle M&A. We are conscious that one more M&A deal in the lithium sector would 'light up' equities given limited options to play this thematic globally.
However, Martin also warned that some ASX lithium shares were struggling to make a profit at the current spodumene/lithium price after factoring in capital expenditure growth. He said:
There is market to market downside risk to consensus earnings in the shorter term given spot lithium prices.
E&P has lowered its lithium forecasts over the next six months, according to the AFR. S&P Global Platts says the current spodumene price is approximately US$760 per tonne, and E&P Financial is forecasting the spodumene price could rise to US$850 per tonne in the second quarter of FY25 and reach US$1,000 per tonne in the third quarter.
The broker suggested Pilbara Minerals and Liontown Resources as potential acquisition targets. E&P Financial said that Fortescue Ltd (ASX: FMG), due to its recent drilling activity, or another industrial company, could want to enter lithium mining.
In the broker's eyes, Pilbara Minerals shares could be the best choice as a "less risky option". This is due to its "strong" balance sheet with a large cash pile, a competitive cost structure and potential for growth following a recovery of lithium prices, according to the AFR.
So, now may well be a good time to look at ASX lithium shares, if the lithium price and share prices keep rising from here.
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