Newly released reports from brokers have weighed in on Albemarle’s (NYSE:ALB) non-binding indicative offer to acquire Australian lithium producer Liontown Resources (ASX:LTR) with varying positions on the latest offer.
On March 28 2023, Albemarle sent an indicative offer to Liontown to acquire the company for $2.50 per share, which valued Liontown at $5.2 billion on an enterprise basis. Liontown rejected this offer after determining it ‘substantially’ undervalues the company and is not in the best interest of its shareholders.
On the contrary, Albemarle believes the offer represents a compelling opportunity for Liontown shareholders with a per share consideration representing a ‘substantial’ premium for the target’s shareholders.
In a report published by multinational investment bank UBS, it concluded Albemarle’s indicative offer ‘seems pretty full’ noting Albemarle earlier indicated that it believes lithium resource development costs could range in the $5,000 to $25,000 per tonne of lithium carbonate equivalent (LCE). At 85,000 tonnes of LCE capacity in the ‘high’ end of that implies a value of around $2.1 billion.
At 85,000 tonnes of LCE capacity in the ‘high’ end of that implies a value of around $2.1 billion
UBS also says there are other projects in development and room to expand spodumene production which have not been considered, and notes Albemarle’s offer reflects an approximate $1.3 billion premium to a potential greenfield development cost. This premium could also reflect utility and infrastructure investments made to support eventual lithium hydroxide facilities.
Based on the ‘high’ end Albemarle cost estimates, the investment banking company says 85,000 tonnes of lithium hydroxide production facilities could cost about $2.5 billion in additional spend and notes these downstream facilities would not start up until 2029, and have likely seen minimal capex spend to date.
Contrasting this view, Australian stockbroking and investment advisory firm Bell Potter Securities supports Liontown’s rejection of the offer. The firm says Liontown’s rejection stems principally to be based on value and opportunistic timing of Albemarle’s approach.
It also notes Liontown’s board and management own around 19% of the company’s shares which provides a defence against scheme proposals. Bell Potter reports its operations, highly risked and base calculations of Liontown is $2.81 per share using a conservative lithium price outlook of US$1,300 per tonne of spodumene concentrate.
Bell Potter says Albemarle’s proposed acquisition of Liontown would deliver it a large, long-life bolt-on project with production ramping up from mid-2024…
Bell Potter says Albemarle’s proposed acquisition of Liontown would deliver it a large, long-life bolt-on project with production ramping up from mid-2024, complementing its existing Australian mining operations and downstream lithium businesses.
Canaccord Genuity says while the deal seems fair based on its net present value (NPV) calculations, it agrees that the offer is opportunistic given the recent equity pullback experienced by the sector as lithium pricing eased.
Canaccord Genuity also notes while the funding gap of more than $300 million for Kathleen Valley remains, it believes management confidence in rejecting the offer likely implies a solution to the capex and working capital shortfall is close to being resolved. Canaccord reports Liontown has numerous options including equity, debt, direct shipping ore (DSO), and potential offtake prepay on uncommitted spodumene concentrate production.
As for broader implications for the market, Canaccord says the transaction provides a piece of information on what a large scale lithium business might be thinking in terms of long term pricing of around US$1,750 per tonne of spodumene concentrate.
It also may impact lithium markets as consumers think about the loss of an independent lithium producer and become concerned around project timelines. Canaccord reports if this were the case, it may provide some support to pricing.
Australian investment and advisory group Jarden reports it has lifted its 12-month target price in line with Albemarle’s latest offer of $2.50 noting Albemarle publicly stated its willingness to engage immediately with Liontown’s board to determine a mutually acceptable outcome. Jarden says this could include a higher offer and notes its sum of the parts (SOTP) valuation remains unchanged at $1.49 per share.
This was determined due to material funding shortfall, opex increase risks and development, and processing infrastructure construction execution and commissioning risks ex the corporate approach.
US investment bank Mizuho Securities USA states given the degree of uncertainty, project timeline, and original capex; it believes Albemarle’s offer is ‘generous’.
Global investment bank RBC Capital Markets says given the decline in lithium price; some investors may be thinking earlier stage projects such as Liontown could be available at lower prices later in the year.
Australian stockbroking and wealth management company Morgans reports it is possible Albemarle will lift its offer, or a third party comes forward to compete with it. However, it says given the ‘significant’ premium to its trading range and the much smaller discount established, and operating peers, it believes it is harder to see a markedly ‘higher’ bid to justify investors increasing their take.
Images: Liontown Resources Ltd
