Rio Tinto Warns of Risks for Paying High Premiums for Lithium Mines after Plunging Lithium Prices Triggered Acquisition Rush

The sharp drop in lithium prices since late last year has driven major mining companies to rush to acquire companies with early-stage or pre-production lithium projects.

However, Rio Tinto, the world's second-largest mining company, has warned that offering large premiums to smaller miners is risky. Rio Tinto Chief Executive Jakob Stausholm said he was "cautious" about acquisitions at current valuations, despite the company's desire to expand its fledgling lithium business.

“Unless you already know you can sell lithium at a high price, it’s very difficult to justify buying at that high a price,” he said. "We have to make sure it's also in the interest of our shareholders, not just the shareholders of the company being sold."

The price of lithium carbonate, used in electric vehicle batteries, has fallen 70% from a peak in November last year. While that has negatively impacted stock valuations for some smaller miners, a growing number of companies are poised to offer hefty premiums as they seek a piece of what promises to be one of the world's hottest commodities.

American Albemarle (ALB.US) has repeatedly sought to acquire Australian lithium miner Liontown Resources, and the latest bid is 5.5 billion Australian dollars (about $3.3 billion) at a premium of 64%. Tianqi Lithium is also trying to acquire Australian lithium mine Essential Metals Limited at a premium of 45%. However, both acquisitions were rejected because the sellers wanted a higher price.

Despite a number of new lithium mine projects coming online in the next few years, potential buyers are betting that these mines will reach their full production, in addition to betting on a rebound in lithium prices. But that's not a sure thing.

Most market players remain optimistic about the long-term demand outlook for lithium, so the trend of offering large premiums to smaller lithium miners will continue. Governments around the world are also working to achieve a faster transition to clean energy. Competition in the lithium industry has also drawn interest from battery makers and even electric car makers. Tesla has been considering buying Sigma Lithium Corp., which is developing a large lithium mine in Brazil.

In addition, Fiona Hick, chief executive of Australian iron miner Fortescue, said on May 3 that Brazil, Chile and Argentina are the most promising countries for lithium, copper and rare earth trading and exploration. Mid-sized or small lithium producers such as Pilbara Minerals Ltd. also see an opportunity to up their bets.

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