PILBF - AU$4 Billion Galaxy/Orocobre Merger to Create Top 5 Lithium Company

Australia’s Orocobre (TSX: ORL ,ASX:ORE) and Galaxy Resources (ASX: GXY ,OTC Pink:GALXF) agreed this week to join forces in a AU$4 billion “merger of equals.” The deal comes as demand for lithium for electric vehicle (EV) batteries continues to pick up pace.

Once the merger is complete, the new company will become a top five lithium chemicals company globally — and top three outside of China — with production capacity of around 40,000 tonnes of lithium carbonate equivalent per year.

“The merged entity’s growth opportunities in both brine and hard rock position it uniquely to take advantage of expected rising EV demand for lithium,” Galaxy Chairman Martin Rowley said .

Galaxy has been advancing plans to develop the Sal de Vida lithium brine and potash project in Argentina, while Orocobre operates the Olaroz lithium-producing facility in the same country.

Commenting on the deal, Reg Spencer of Canaccord Genuity told the Investing News Network (INN) that he is positive on the transaction.

“The merger would give the combined entity significant scale, geographic and product diversification and better access to capital,” he said. “Assuming all projects delivered by 2025, market share would be about 13 percent, and given we expect the market to be in deficit, the increased supply would be unlikely to have a negative impact.”

Aside from its Argentina project, Galaxy also owns the Mount Cattlin mine in Ravensthorpe, Western Australia, which is currently producing spodumene and tantalum concentrate, as well as the James Bay lithium pegmatite project in Quebec, Canada.

Additionally, Orocobre and Toyota Tsusho (TSE: 8015 ) are finalizing plans to jointly develop a 10,000 tonne per year lithium hydroxide plant in Fukushima, Japan.

“I am certainly bullish,” Paola Rojas of Synergy Resource Capital told INN, adding that the lithium market is still quite small globally, and it’s facing an unprecedented increase in demand over the next decade.

“Larger players, I believe, will be needed to provide more security and stability to supply, as well as ramping up capabilities,” she said. “With the lithium future contracts soon to be launched, I see this as another signal of strength and health. More institutional capital will be pouring in, for certain.”

Under the proposed merger, Orocobre will purchase all of Galaxy’s shares, while Galaxy’s shareholders will receive 0.569 Orocobre shares for each Galaxy share held at the scheme record date. The merger is subject to all regulatory and shareholder approvals.

For Rojas, Orocobre’s expertise of taking an asset from acquisition to production will allow the combined entity to take Galaxy’s Sal de Vida project, complete development works currently in progress and move through to production quite quickly, taking full advantage of Orocobre’s valuable experience.

“On the other hand, Orocobre’s shareholders will benefit from jurisdiction diversification via two of the safest places to invest, as well as access to a different variety of lithium,” she said. “It is also likely that they’ll be able to fund internally the expansion of their inventory and development, if not CAPEX, as they seem to be doing well in terms of cash and debt.”

That said, there are a few hurdles the combined company could face going forward.

Spencer said these challenges will not be insignificant given the scale of the undertaking, which effectively involves three projects: the Olaroz expansion, and Sal de Vida and James Bay development.

“I don’t expect financing to be an issue, but usual challenges associated with new lithium project builds would definitely apply,” he added.

As the lithium price environment stabilises after a few years of being under pressure, the market could see more merger and acquisition activity. So far this year, lithium prices have seen an uptick on the back of higher EV sales in key markets such as Europe.

“I think as lithium chemicals pricing continues to strengthen, and the realities of the crunch we will all feel soon set in, international players will continue to look around for advanced assets to acquire, and some of these companies will likely prefer to join forces instead of being taken over,” Rojas said. “We should see at least a couple more during the rest of 2021, albeit likely to be smaller, on or below $100 million.”

The lithium market has already seen quite a lot of merger and acquisition activity, with IGO (ASX: IGO ,OTC Pink:IIDDY) taking a stake in Greenbushes, Pilbara Minerals (ASX: PLS ,OTC Pink:PILBF) acquiring Altura Mining and now the Orocobre and Galaxy proposed merger.

“Given the outlook for the sector, I expect more, but mainly for higher-quality assets,” Spencer said. “I won’t rule out the potential for non-lithium companies to enter the industry via acquisition.”

Following the news on Monday (April 19), shares of Galaxy jumped more than 10 percent, while dual-listed Orocobre saw an increase of more than 8 percent from its Friday (April 16) closing price.

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Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.