Introduction
Lithium is a chemical element (Li) that in its purest form takes the form of a soft silver metal, the lightest metal on Earth. Lithium is obtained as lithium hydroxide, a white, crystalline substance, or lithium carbonate, a white, powdered substance, through two different methods: extracted from hard rock itself or recovered more easily and cheaply through the process of solar evaporation in large saltwater brine basins.
Today, Australia is the global leader of lithium production, with five mines that account for around 47% of the total lithium production around the world. Here, the lithium is extracted through hard ore extraction which involves breaking chunks of rock, crushing and milling it, and then sending it to be separated into lithium. On the other hand, all the countries in South American Andes region, which account for a large part of the rest of global lithium production, find their lithium storages concentrated in large saltwater brine basins. In this case, the process for extraction is to use solar evaporation which involves pumping brine to the surface of the water and waiting for the sun to evaporate the water, leaving a product of concentrated lithium chloride. Given the growing need for lithium, new mines are constantly being developed across the world with the majority aiming to tap into the lithium reserves in the salt flats of Bolivia, Chile, and Argentina which account for more than half of the estimated global lithium resources.
Today, lithium is used in several different contexts; primarily to make rechargeable batteries for electronics like laptops, mobile phones, electric vehicles, and grid storage but also in ceramics and glass as it increases durability and thermal resistance to extreme temperatures. The figure below shows the breakdown of lithium’s different uses:
Source: Government of Canada
Lithium is very important as it is a key component in helping facilitate the energy transition. Given the growing demand for lower emissions across all industries, including the transportation industry, lithium is becoming increasingly popular due to its importance in the makeup of the batteries needed to help power electric vehicles. (EVs) All EVs have lithium-ion batteries, the most efficient means of storing electricity, which are based on a flow of lithium ions from a positive cobalt or manganese electrode to a negative graphite electrode.
As the transition towards net-zero emissions continues to progress rapidly, the number of EVs on our roads will no doubt have to increase dramatically as well. This inevitably means a greater quantity of lithium is needed to help power these vehicles. In 2021, 500,000 metric tons of lithium carbonate were needed, and this figure is expected to rise to between three and four million tons by 2030. This is however not believed to be an issue with conventional means of harnessing lithium expected to increase by 300% along with direct lithium extraction (DLE) and direct lithium to product (DLP) technologies expected to significantly enhance the industry’s ability to meet the soaring demand.
Furthermore, the Inflation Reduction Act (IRA), Joe Biden’s $369bn climate change legislation, also contributed to the growing demand for lithium. The act incentivized the use of electric vehicles which encouraged domestic lithium production and led to the construction of several EV and battery factories in the United States. However, Masters have said that while this legislation is crucial, “it never really filtered down to critical minerals.” While car manufacturers get tax credits for their production of EVs, lithium producers do not get the same treatment. Lithium producers are hoping that car companies will be willing to pay a premium for their lithium given that it would help them secure substantial tax credits on their vehicles of up to $3,750 under the IRA.
Lithium Price
Source: Bloomberg, BSIC
Lithium, colloquially known as white gold, had few commercial uses until the advent of the lithium-ion battery. Suddenly, a new gold rush began with global exploration winding up. Prices remained relatively stable at around 12000 $ per metric tonne of lithium carbonate throughout the end of the 2010s (lithium carbonate is the major commercial form of lithium). However, a new revolution was on the horizon.
With global warming at the forefront of international politics and new technological advances, EV demand picked up during the 2010s but truly boomed during the pandemic. Commitments from different governments, such as the EU and California, to phase out fossil fuel vehicles by 2035 caused global car manufacturers to commit to only developing and selling electric vehicles, such as Volvo’s [STO: VOLV.A/VOLV.B] commitment for 2030. While the Lithium supply increased from past investments, it could simply not keep up with ever-increasing demand. At its peak, in Nov/Dec of 2022, the price of lithium carbonate ballooned to around 68000 $ per metric tonne. As 2023 rolled around, EV sales growth slowed, and car manufacturers such as Ford [NYSE: F], General Motors [NYSE: F], Mercedes-Benz [XE: MBG], Volkswagen [XE: VOW], Jaguar [BSE: 500570], Land Rover [BSE: 500570] and Aston Martin [LSE: AML], subsequently scaled back or delayed their commitments to EV technology. This worsening trend, coupled with an increase in supply from newly operational mines, radically reduced prices to 16000 $ per metric tonne by Dec of 2023.
In 2024, prices decreased to 10000 $ per metric tonne (as of Oct 2024) as it became more unclear if the emission standards would be upheld and as China’s supply-side response continued oversupplying the market. Chinese lithium converters have intentionally oversupplied the market to reduce foreign competition/investment. This predatory strategy’s motive is to secure China as the premium lithium producer of the future, as lithium mines take years to be fully operational. The short-term outlook of lithium, therefore, is dim as oversupply will continue to deflate prices. Rival firms and countries have, however, upheld their commitment to lithium due to its long-term potential in a carbon-neutral world.
Where is Lithium found?
Source: World Economic Forum, BSIC
Lithium is inherently scarce. While estimates vary, roughly 105 million tonnes exist on Earth, a quarter of which is feasibly mineable. Few countries have significant deposits. Fewer countries have maximized production. The largest deposits are found in South American salt flats in what is known as the lithium triangle, spanning Chile, Argentina, and Bolivia. This area is still being commercially developed due to the investment timeline. In the late 2010s, when lithium demand skyrocketed and expectations were sky-high for an EV future, investments were made in increasing production to match efforts made by the other top producers, China and Australia. These investments are now under significant peril from conservation efforts and low prices decreasing profitability. Lithium mining is extremely detrimental to the environment, with one tonne of lithium creating 15 tonnes of CO2 and severe water pollution.
There are doubts among environmentalists and citizens regarding whether the long-term effects of these operations are worth the economic benefit. Economic benefit, which is increasingly dubious with significant oversupply in the market suppressing prices. However, Argentinian and Chilean government officials have reaffirmed their commitment to lithium production through deregulation and nationalization. The Chilean president, Gabriel Boric, has required all new lithium projects to be majorly by the state, while the Argentinian president, Javier Milei, is pushing for broad deregulation. If EV demand rebounds, these investments will pay off otherwise, the delicate environment of the South American Salt Flats will be polluted for little economic gain. Bolivia is also attempting to cash in on this new gold rush after years of government stalling, causing them to fall behind their neighbours in terms of production. President Luis Arce boldly stated his plan to have Bolivia produce up to 40% of the world’s supply by 2030. After the lithium triangle, the next largest deposits are in the United States, Australia, and China (in that order).
Source: US Geological Survey – 2024, BSIC
Australia dominates the world in production, with around 86000 tonnes of lithium produced compared to 2nd place Chile’s 44000 tonnes. Their position is due to key investments in the mining of hard rock spodumene sources of lithium, which are significantly faster to extract compared to salt-lake brine deposits. China, in 3rd place (for production), has a unique set of circumstances. Their large market presence in lithium-ion batteries, cell manufacturing for the car industry, and other secondary products provides a direct and vast demand for lithium. The United States, on the other hand, is in a dilemma. While similar with extensive secondary industries, Native American communities have largely blocked mining efforts. Many lithium deposits run underneath or near sacred lands to the point where mining operations would severely pollute the land. These concerns and severe international competition have largely blocked any significant progress.
The mining industry is a risky capital capital-intensive business. Businesses must lay down millions or billions in funding to have an operating mine in a few years. Price fluctuations, ecological risks, and safety risks all amplify the uncertainty of the returns. Few firms control a majority of the production. The largest player is Albemarle [NYSE: ALB], with mines operating in Australia, Chile, and the United States. They manufacture specialty chemicals focusing on lithium, bromine specialties, and catalysts. They are reopening a lithium mine at Kings Mountain in North Carolina with an expected operational date of 2027. They have also invested 1.3bn $ in a processing facility in South Carolina, which will process battery-grade lithium hydroxide. The next largest firm is Sociedad Química y Minera de Chile S.A [NYSE: SQM], which, as the name suggests, is a Chilean chemical and mining firm. After being privatized in 1983, SQM became one of the largest producers in the region. As of May 31st, 2024, SQM and Codelco (a state-owned mining company) signed a public-private partnership that partially nationalizes lithium mining within Chile. Interestingly, in 2018, Tianqi Lithium [SZSE/HKEX: 002466/9696], a Chinese company that operates in Australia, Chile, and China, bought a 23.77% stake in SQM for 4.1bn $. They are the fourth-largest producer of lithium in the world, with their current stake in SQM residing at 22.16%. They are contesting Chilean regulators over this partnership agreement. The third-largest lithium manufacturer is China’s Ganfeng Lithium [SZSE/HKEX: 002460/1772], which operates in Western Australia, Argentina, Mexico, and China. They recently acquired 70mn $ in shares of a subsidiary of Lithium Americas Corp. [TSX/NYSE: LAAC] holding the Pastos Grandes project in Salta, Argentina.
Latest M&A Activity: Rio Tinto to acquire Arcadium Lithium
Rio Tinto [ASX: RIO], the world second largest mining company, is set to acquire Arcadium Lithium [NYSE: ALTM], the US-based producer of Lithium company for $6.7bn. With rumours going on for a while, as the Anglo-Australian mining company had been in the hunt for Lithium deals, Rio Tinto first announced on October 7, 2024, that they had reached a non-binding agreement to acquire Arcadium. Following the announcement, Arcadium shares had an initial spike of over 45%, while Rio Tinto fell 2%, during the early hours of trading of Monday 7.
Arcadium Lithium was formed following the merger of Allkem, one of Australia’s largest lithium producers which was backed by Toyota, with Livent, its US rival, in May 2023. The all-share deal, which valued the newly formed company at $10.6bn had Allkem becoming its largest shareholder with 56% of the newly formed entity. At the time, Arcadium was expected to become the third largest Lithium producer by 2027, with an estimated production capacity of 250,000 tonnes. Moreover, the merger created a large and strong company, with significant CapEx and Cost synergies, that was better position to compete with the Chinese mining companies, who dominate the broad critical minerals industry. Furthermore, the deal came at a time where Lithium prices had dropped by more than half from its $80k heights, creating what industry executives called “a landing space” for the two businesses to match their valuations and agree upon a deal. Following the merger, and prior to the deal with Rio Tinto, Arcadium share price had dropped 40% throughout 2024. It is worthwhile to note that at the time Rio Tinto warned about the risks about overpaying for takeovers.
The Rio Tinto – Arcadium deal was confirmed by both parties on October 9, 2024. Rio Tinto will pay $6.7bn in cash, representing a pay of $5.85 per share, a 90% premium over the targets closing price on October 4. The transaction is expected to close in mid-2025. It is the largest Lithium acquisition to date, and is expected to make Rio Tinto the third largest producer. Following the announcement, Rio Tinto CEO commented that the deal “was not transformative in terms of size, but it is more transformative in terms of how it shapes our portfolio”, a very optimistic approach as the mining company believes the Energy transition will happen in the long-term, and it will demand more batteries, which in turn require Lithium. The combined company now will produce Lithium in Argentina, Australia, Canada, and potentially Serbia, where a proposed project is facing public opposition. Investment Banks have calculated that Lithium has the potential to account for ~4% of Rio Tinto earnings by 2028.
While Lithium prices have dropped +80% since its peak in 2022, and the previous Allkem – Livent merger was of $10.6bn, the $6.7bn acquisition doesn’t come cheap. Analysts at RBC expected the deal to close at a lower premium, of 30% rather than 90%, representing a total Enterprise Value of $4.6bn. The offer price for $5.85 is more than double than Arcadium 90-day average trading price, and FY +1 estimates (2024 earnings) show the EV/EBITDA multiple being of +18.0x. This is larger than the 15.0x EV/EBITDA multiple that Albemarle, the world’s largest Lithium producer, trades at, showing a possible example of overpaying for a competitor. However, M&A is potentially a safer way for Rio Tinto to increase their exposure to Lithium compared to spending vast amounts of resources on greenfield projects that have no certainty on being successful.
Nonetheless, as the deal requires the approval of 75% of Arcadium investors, a large premium over the share price was expected. However, even though the 90% premium seems large, some of Arcadium shareholders have already announced they will vote against the deal and are rather looking for an Enterprise Value closer to the $8bn.
Conclusion
Overall, one can’t ignore the importance of Lithium for the Energy Transition. Nonetheless, the current slowdown in the sale of EV coupled with changes in the political environment in countries as the United States may create adverse conditions for the industry in the coming years. Hence, prices may be unlikely to go back to record high prices as there is no longer shortages in production + high demand, but rather a steady state. Furthermore, companies as Rio Tinto, who are growing their stake in the Lithium industry, will probably find their investment to be worth it in the years to come. While it may not be immediate, the industry is very likely to rebound as the energy transition will happen for sure, and it can’t occur without batteries for power storage.
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