ALB - Liontown Resources: New Offer Doesn't Impress

2023-09-06 05:13:59 ET

Summary

• Albemarle raises a bid to acquire Liontown Resources in an all-cash transaction at A$3.00 per share.
• The increased bid is 20% higher than the previous offer and values Liontown at $4.3 billion.
• Liontown Resources' shareholders have the option to sell or hope for a higher bid, with limited downside risk.

Months after Liontown Resources Limited ( OTCPK:LINRF ) rejected a takeover bid from Albemarle ( ALB ), the bid has been raised. The Australian lithium miner hasn't issued a press release, but Albemarle suggests the Board of Directors would accept a binding bid for A$3.00 in all cash. My investment thesis remains Bullish on Liontown Resources, though not necessarily excited about a new deal offer slightly above the current stock price.

Increased Bid

On September 3, Albemarle announced a proposed bid to acquire Liontown Resources in an all-cash transaction at A$3.00 or $1.94 per share. The deal values Liontown at A$6.6 billion, or $4.3 billion on an equity value.

Albemarle raised the price by A$0.50, or 20%. With lithium prices falling in the last 5 months since the prior deal, Liontown Resources would definitely find the all-cash deal far more appealing than the prior offering below the prior stock price.

The stock closed last week at $1.73 providing for limited upside for Liontown Resources investors of just 12%. Not to mention, the deal is non-binding with Albemarle still looking to enter a non-disclosure agreement in order to undertake a period of due diligence to negotiate a binding deal.

A prime reason the stock price appears too low is that Albemarle is talking about the deal being very accretive. Liontown Resources shareholders should benefit from this upside, not Albemarle shareholders via an all-cash deal that will take until at least mid-2024 to potentially close.

Lithium Production Around The Corner

Liontown Resources is appealing to Albemarle due to the Kathleen Valley mine reaching production in mid-2024. The mine is less than 12 months away from the crucial milestone in a lithium market short on supply.

The mine is attractive due to the location in Australia friendly with the U.S. In addition, the Kathleen Valley asset has a large 5.4Mt resource and Liontown Resource has a secondary project in Buldania with solid lithium potential.

Analyst estimates have Liontown Resource revenues reaching nearly $500 million next FY. The mine opens up around the end of FY24 next June with full revenues targeted for FY25. Consensus revenue estimates jump to $715 million in FY26, though the analyst estimates appear far below reality and the levels Albemarle use to value the stock.

The lithium giant suggests the Kathleen Valley mine hits the 550Kt SC6 Phase 1 volumes in 2026 where the adjusted EBITDA for the mine reaches $955 million based on a transaction value target of ~4.5x EBITDA. The revenues would actually reach $2.1 billion based on $30 Kg prices.

Liontown Resources plans to boost production via a Phase 2 option increasing output to 700+Kt SC6. Albemarle lists the production targets for 2030 and a prime reason why the company is willing to make this offer.

The stock value of $4.3 billion appears to undervalue Liontown Resources for the potential profits of the business and the scarcity value of lithium. Albemarle is seen as cheap trading at ~6x current 2023 adjusted EBITDA targets in the $4 billion range.

Liontown Resources shareholders have the option to sell the stock and move on, or hope for a higher bid. The stock likely has limited downside risk due to the value of lithium and the eventual binding bid from Albemarle at $1.94 per share in cash.

Takeaway

The key investor takeaway is that shareholders are likely disappointed that management appears intent on accepting a deal from Albemarle at prices below where the stock traded most of the last year. The risk appears minimal here due to Liontown Resources not needing this deal and the potential upside from higher lithium prices.

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