Rio Tinto share price rises on $10b Arcadium Lithium takeover deal

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The Rio Tinto Ltd (ASX: RIO) share price is rising on Thursday morning.

At the time of writing, the mining giant's shares are up 1% to $119.22.

Investors have been buying the miner's shares this morning after it announced a deal to acquire Arcadium Lithium (ASX: LTM).

According to the release, the two parties have signed a definitive agreement under which Rio Tinto will acquire Arcadium Lithium in an all-cash transaction for US$5.85 per share (A$8.71 per share).

This represents a whopping 90% premium to Arcadium's closing price of US$3.08 per share on 4 October 2024. The total value of the offer is approximately US$6.7 billion (A$10 billion).

Rio Tinto notes that the transaction will bring Arcadium Lithium's world-class, complementary lithium business into its portfolio. It feels this establishes it as a global leader in energy transition commodities – from aluminium and copper to high-grade iron ore and lithium.

Management notes that Arcadium Lithium is a global, fast-growing, vertically integrated lithium chemicals producer with an asset base of long-life, low-cost operations and growth projects.

It has leading capabilities in lithium chemicals manufacturing and extraction processes, including hard-rock mining, conventional brine extraction and direct lithium extraction.

Arcadium Lithium's current annual lithium production capacity across a range of products including lithium hydroxide and lithium carbonate is 75,000 tonnes lithium carbonate equivalent. However, it has expansion plans in place to more than double capacity by the end of 2028.

But this expansion shouldn't weigh on Rio Tinto's free cash flow. Management expects Arcadium Lithium's projected growth capital expenditure to represent approximately 5% of group capital expenditure of up to US$10 billion across 2025 and 2026.

Despite paying a 90% premium, Rio Tinto believes that the transaction has "compelling economics."

It notes the transaction offers compelling value driven by accelerating volume growth in a rising market, which contributes to significantly higher EBITDA and free cash flow in the outer years. This is before anticipated synergies.

Management believes that the deal is consistent with Rio Tinto's disciplined approach to capital allocation and will unlock significant value for shareholders.

It is also confident in the long-term outlook for lithium. With a more than 10% compound annual growth rate in lithium demand expected through to 2040, it feels there will eventually be a supply deficit.

So, with spot lithium prices down more than 80% versus peak prices, management believes this counter-cyclical acquisition comes at a time with substantial long-term market and portfolio upside, underpinned by an appealing market structure and established jurisdictions.

Commenting on the deal, Rio Tinto's CEO, Jakob Stausholm, said:

Acquiring Arcadium Lithium is a significant step forward in Rio Tinto's long-term strategy, creating a world-class lithium business alongside our leading aluminium and copper operations to supply materials needed for the energy transition.

Arcadium Lithium is an outstanding business today and we will bring our scale, development capabilities and financial strength to realise the full potential of its Tier 1 portfolio. This is a counter-cyclical expansion aligned with our disciplined capital allocation framework, increasing our exposure to a high-growth, attractive market at the right point in the cycle.