Merger and acquisition activity in the lithium supply chain has caught the attention of investors who have caused share prices to jump for new and upcoming projects, while traditional producers have struggled with low product sales prices and an oversupplied market.
Australian conglomerate Wesfarmers’ bid for lithium producer Kidman Resources has excited the market once again and boosted interest in the share prices of those lithium producers, both newly in production and next in line, that are still open to investment or partners.
Wesfarmers announced the proposal on May 2. The 100% acquisition was valued at $776 million and is subject to due diligence, approvals and final board agreements. The deal includes a 50% stake in Mount Holland lithium project in Western Australia, with the other 50% owned by leading lithium producer Sociedad Quimica y Minera de Chile SA (SQM).
Other new producers and junior mining projects that have already found partners, such as Mineral Resources which formed a joint venture with Albemarle for the Wodgina project and Lithium Americas with Ganfeng, have not been that affected by the Wesfarmers bid, as their share prices had already been boosted by their individual partnering announcements.
Other miners still open to investment have seen share prices rise since Wesfarmers’ bid for Kidman Resources, see chart 2. For example, Pilbara Minerals is considering partners for an uncommitted stage 3 offtake, chemical plant participation and potentially a 20-49% minority ownership of the project. When it announced it was looking for stage 3 partners on March 28, share prices rallied some 16%, but then fell back when there was no fresh news of actual partnerships. The price rallied again on the back of Wesfarmers’ bid for Kidman Resources since the bid may signal that other large corporations may start to get more interested in merger and acquisition activity in the lithium space.
Share prices of junior lithium miners Birimian Ltd, Bacanora Lithium, Sigma Lithium and Neo Lithium, among others, also rose on the back of the Wesfarmers bid.
This shows M&A activity has potential to breathe life into those miners and projects that could still benefit form fresh investment, as in the case of Kidman Resources. If the Wesfarmers bid goes ahead, Wesfarmers will also invest its share of the extra project capital needed to bring the Mount Holland project into operation. Wesfarmers estimates its share of that project capital could be $600 million, so M&A activity is likely to remain a lifeline to those projects that still need financing.
The rising tide from the Wesfarmers bid has not lifted all boats, the “Traditional 5” producers from South America have all remained under pressure, especially Livent who issued a sales warning on May 8.
Generally, lower spot and new contract prices and increased competition is weighing on these traditional producers. Fastmarkets forecasts the spot lithium carbonate price, cif China, Japan and Korea, to average $10.25 per kg in 2019, after a range last year of between $14 and 17.60 per kg. The price was recently assessed at $11-13 per kg. The traditional producers may even have to take the lead in restricting supply to underpin prices. SQM announced its 2019 sales would be some 10,000 tonnes of lithium carbonate equivalent (LCE) below its production, meaning it will stockpile material and Albemarle has said it would only sell spodumene from the Wodgina project if there was demand for it and they could get their required margin – these both seem proactive steps to help avoid too much oversupply.
The other equities that have underperformed have done so for various reasons: Advanced Metallurgical Group (AMG) is a well-established diverse producer and therefore not a pure lithium play and Nemaska Lithium is still struggling following its announcement in February that it needed extra financing. Nemaska is now following a dual-track financing action plan to raise equity, and/or look at M&A opportunities.
While Wesfarmers is an outsider investing in the lithium supply chain, there are many potential companies that will need lithium that could also be interested in securing supply, or indeed have access to lithium at the cost of production. As such, we do expect M&A activity to pick-up and for that to boost the share prices of those involved. That said, share prices might rise into any M&A event, but then subside once a deal is done - this is because the more M&A that is done the more likely those projects will come on stream sooner rather than later and that could push the next supply deficit further down the road.
Our outlook is bullish for demand for electric vehicles and energy storage systems and we expect strong compound average growth rates (CAGR) of 35% and 42% for each respectively. But, not wanting to over simplify the situation too much, the sudden pick-up in new lithium production in 2018, which will ramp up this year with more of the new material getting qualified, means the market has suffered a significant supply response in a short period of time and it will take demand, even at 35% CAGR, time to catch up.
So while lithium prices look set to remain depressed due to current oversupply, M&A activity in the industry may well step up a gear when potential buyers, and those looking to secure supply, take advantage of this low price environment.
Learn more about Fastmarkets’ lithium pricing methodology here and read the latest lithium price spotlight here.