LTHM - Allkem-Livent Merger Will Create Value

2023-05-18 10:54:00 ET

Summary

• The Allkem-Livent merger will vault the combined company into the top-tier of lithium producers.
• The new integrated producer will have major assets in all the world’s major lithium producing regions.
• The deal assembles a broad set of hard rock and brine skills under one corporate umbrella.

Like most lithium producers, both Livent Corporation ( LTHM ) and Allkem Limited ( OROCF ) had been pursuing aggressive organic growth strategies over the course of the past year. Livent was pouring billions of CapEx dollars bulking up its refining capacity and growing its Argentinian brine operations while simultaneously making a move into hard rock, by way of its Quebec-based Nemaska project. And on its end, Allkem was planning to triple its lithium production by 2026 through added brine production coupled with a move into refining to complement its Australian hard rock assets.

Livent wanted to continue being one of the world’s leading lithium companies, a position it’s been in for decades, and Allkem’s management was set on maintaining a 10% share of the global lithium market. Therefore, most investors would not have been overly surprised to hear that either of these companies was acquiring a smaller player; however, when news broke that the two had agreed to merge, many industry watchers began to wonder what kind of company this amalgamation would create and how it may impact the broader sector. In this article, we'll review the Livent/Allkem deal and discuss what it might mean for the lithium industry.

The Deal

As many readers are probably already aware, the all-stock deal is being billed as a “merger of equals”; although, and as is usually the case, that’s not exactly true as Allkem’s shareholders will wind up with 56% of the new company while Livent’s shareholders will control 44%. Board seats will be split evenly, but Allkem’s chairman will be running the board while Livent’s CEO and CFO will be running the company. That seems reasonable as Paul Graves, Livent’s CEO, has proven to be a steady hand on the tiller.

The rest of the administrative details are what one would expect from a deal of this size and this nature; company HQ to be located somewhere in North America; the primary stock listing will be in New York, but it will also have an ASX listing; $125 million in run-rate synergies on top of $200 million in one-time CapEx savings; and, as is logical when combining two companies, bigger market cap, bigger revenue, and bigger EBITDA. As can be seen in the exhibit below, the deal will also vault Allkem/Livent to third place on global league tables of yearly LCE production.

However, none of these details, maybe with the exception of the cost savings, will bring additional value to shareholders in my view. The fact that Allkem and Livent will be able to slightly outproduce Ganfeng Lithium Group Co., Ltd. ( GNENY ) is unlikely to drive sustained investor interest. The two companies’ total combined productive capacity is not what’s compelling about this deal; the real value lies in the geographical distribution of the merged company’s productive assets along with its ability to capture a broader set of skills under one corporate umbrella.

The Value

Given its long-term positive outlook and growing geopolitical strategic value, one would think that the lithium industry would now have several large fully integrated companies with extensive operations in all the world’s established and emerging lithium producing regions. But that’s not the case.

Of course, such a company does exist in Albemarle Corporation (ALB), but that’s clearly not enough given last year’s surge in prices. Auto OEMs’ inability to get hydroxide and carbonate when and where it was needed even forced companies such as Tesla Inc. ( TSLA ) and General Motors Company ( GM ) to invest in upstream refining and mining operations.

As can be seen in the exhibit below, by becoming a large integrated producer with operations in North and South America, Australia, and Asia, the combined Livent/Allkem will follow Albemarle in having producing assets in all the world’s major lithium producing regions.

The new company will also have a healthy geographically-diversified pipeline with new assets regularly coming online within the coming years. This should allow it to meet customer demand for carbonate and hydroxide wherever it’s needed, and that’s something that is increasingly becoming more important given growing resource nationalism and governmental policies geared towards encouraging battery producers to source their lithium domestically.

And while Livent is in the process of developing its Nemaska project, the company is not known as a hard rock miner, so it’s easy to see how it might now be able to draw upon Allkem’s Mt. Cattlin spodumene mining experience as it builds out the project.

The same goes for Allkem’s Olaroz project in Argentina. That’s because although Olaroz is a fully operational brine project, it uses traditional evaporation pond methods for lithium extraction. Livent is currently the only lithium producer in the world to have deployed, and be actively using, a Direct Lithium Extraction (‘DLE’) based process to extract lithium from its Argentinian brine.

Granted, given the difficulty most other miners have had trying to implement DLE, one may wonder as to how close Livent’s DLE-based process is to a “true” DLE method where all brine water taken out of the salar is re-injected after having been run through the sorbents, but, regardless, a DLE-based process it is. Therefore, it’s not too hard to imagine how the combined company may explore the possibility of rolling out Livent’s DLE-based method to Allkem’s Olaroz operations.

Takeaway

The proposed combination seems to make a lot of sense on paper, and the market’s positive reaction to the merger announcement leads one to believe that many investors are rather enthusiastic about the combination. Both stocks have risen substantially over the last month.

The new company to be formed by the combination will likely become a core holding for lithium investors in the years to come. However, given both stocks’ recent runup, the execution risk in implementing the proposed cost saving measures, as well as near-term macro factors that may weigh on the price of lithium, I rate both stocks a Hold for now. But I will be revisiting these stocks and stand ready to change my opinion should the share prices pull back in a meaningful way.

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