Company Interview / Blackwattle sees Rio's lithium bid as opportunistic

Tim Riordan from Blackwattle Partners expresses concern about Rio Tinto's (ASX: RIO) approach to Arcadian Lithium (ASX: LTM), viewing it as opportunistic and undervaluing the company. Arcadian's (ASX: LTM) shares rally in response to the news. Blackwattle calls the approach opportunistic.

Tim highlights Arcadian's (ASX: LTM) unique assets in Argentina and Canada, difficult to replicate, providing strategic value beyond immediate earnings. He suggests a potential value greater than the $4-6 billion range mentioned, noting that Arcadian has opportunities for significant growth.

Discussing the potential acquisition, Tim acknowledges Rio's strategic interest, given its existing operations in Argentina. While Arcadian (ASX: LTM) can fund its growth, Rio's (ASX: RIO) involvement might ease financial stresses. Despite uncertainty about the lithium cycle's bottom, Tim sees growth in EV networks as promising for Arcadian.

Full unedited transcript below:

0:00

Elsewhere, Rio Tinto confirming that it has approached Arcadian Lithium regarding a potential takeover bid. Rio saying the approach is non-binding and there's no certainty that any transaction will be agreed to or proceed. Rio said it would make a further comment or wouldn't make a further comment unless it was appropriate. While Arcadian has confirmed the approach

0:19

and Arcadian shareholder Blackwall Investment Partners, calling the approach opportunistic,

0:25

significantly undervalue the lithium company, and there we can see where the shares in Arcadian are rallying big time yesterday off the back of that report. Well, let's get some further detail from a major shareholder of Arcadia, Black Wattle Partners. Tim Reardon is portfolio manager there. He joins us now. Tim, welcome to Wasp. Thanks for joining us. I'm morning Andrew. Assuming this bid hasn't come as a surprise to you given particularly where that where Arcadia's share price has finished.

0:59

Uh yeah I think that's fair. Um, look, Rio has actually been touted, um, in the media for a little while as having interest, um, in Arcadia specifically and more broadly, to consider building out their, uh, their lithium business. Um, and so look, from our perspective, it's been an interesting ride this year, seeing the progression of, uh, Arcadia in terms of the share price and its weakness, particularly relative to the broader lithium space, which whilst also weak, um, you know, not not as harshly treated as, um, as Arcadia.

1:37

Uh, so, yeah, I think fair to say that, you know, if if there was going to be interest, uh, it would, it would make sense to, to take advantage of the situation. Um, that's presented itself.

1:49

Well, you've written a letter to, uh, the Arcadia board. What's the tenor of what you had to say there?

1:56

Look, we we've gotten into the habit over the years, um, of active engagement with with our with our investee companies. We've found that

2:08

being willing to speak to the businesses that we own. Management and the board has been an important part of, um, you know, protecting, uh, the interests of, you know, our, our own investors, um, and, uh, and, and having the confidence to speak about whether it's a governance issue, um, uh, in terms of the way management perhaps paid, um, in this case, um, obviously commenting on on the structure of a deal, I suppose the point that we really wanted to make was that we see, um, as we look for in all the businesses that we own, uh, an opportunity to own a very high quality, uh, mining and, and lithium chemicals business here.

2:52

Um, it's it's, uh, a unique business in that the assets that it owns in both Argentina and Canada particularly are, um, hard, if not impossible to to replicate or replace. And as a result, there is some, uh, value over and above, um, you know, its immediate earnings which are at cyclical, um, uh, cyclical lows. And so from that perspective, um, the strategic value of the, uh, the collection of assets and the business more broadly, um, you know, the the numbers that were quoted in, in, uh, news outlets last week, uh, around Rio's approach, between 4 and 6 billion US felt like they were out of the ballpark versus, uh, the numbers that we thought were probably more reasonable. And so from that perspective, really felt like we should, um, we should just make the point to management and the board that if they were

3:52

considering, um, you know, dealing with Rio, which subsequently they've obviously confirmed that that's, that's the case, that they're in discussions then. Um, it's really just trying to step through why we see, The value at a at a at a range uh, higher than those um, that 4 to 6 that was quoted. Yeah. So you make the point there that you're saying after the recent, uh, Investor Day illustrating the significant value creation possible and execution and time, and therefore you're saying this, if it does fall between 4 or 6 billion, uh, significantly undervalues the potential of that. So you're saying it should be a reasonable offer, then what is fair value as you see right now then?

4:35

Yeah. So the way we've thought about it, um, Andrew, is to sort of consider how these sorts of businesses have traded, um, you know, through the cycle, um, the, the multiples that you sort of see more commonly are in the 9 to 11 range, um, a multiple of EBITDA there. And so if we think about the outlook that our team, um, presented at their Investor day just a few weeks ago, um, you can point to, you know, one of the major attractions for us, which is this enormous growth profiles, these very long lived, uh, expandable assets that they have that whilst do require CapEx to build. Um, the outlook over the next 3 or 4 years is a doubling of production, um, and subsequent to that of potential, um, further doubling of production. And so with that, if we look forward to that initial doubling of production, the EBITDA from, uh, from that doubling looks like, um,

5:33

uh, from Arcadians perspective, um, a bit over a billion, uh, so 1.1. 3 billion. And so that 9 to 11 range, if you take the low end of that, um, equates to sort of in today's dollars at circa 8 billion US, um, which equates to $10 Aussie, um, a share for the stock. And so that's, that's the sort of ballpark that we would have thought, um,

5:59

uh, the board and management would be, would be seeking to sort of open discussions at, um, And the debate from there would be, well, you're receiving the strategic value and and premium to to give up what are fairly, um, fairly unique assets. Um, or would you be better off running them yourself, walking away from any potential bid, um, and, and running them yourself and seeing this business evolve into, uh, a lithium major in its own right over the next sort of three, five and even ten years.

6:34

Have you had a response from the board?

6:37

Uh, to be fair, it's been a very short period of time. Um, since all this is sort of built out, um, to its current sort of, um, I suppose public nature of the, of the discussions. Um, so we haven't yet.

6:53

Um, but we've certainly offered to, you know, to continue to engage and share more detail. Um, if there's, if there's value for, um, for the board and management to do that. And, Tim, do you see this bid as making strategic sense for Rio, particularly given, uh, the vicinity and where they've already got operations in, in Argentina themselves. Yeah. So it is nearby that does it does make sense. Um, and the alternatives that they'd have in terms of building a major lithium business. Um, you know, the other lithium majors in, um, Albemarle, SQM come to mind. Both have, um, structure and geographic kind of challenges. I suppose that, um, that Arcadian don't have, um, also a separation from, um, almost exclusively from, from China as well within the, um, Arcadian asset structure. And so there's, there's a number of attractive, um, elements to the business from Rio's perspective. So, look, it does make sense. Um, and then from

7:52

a funding perspective is probably one of the key issues. The points of feedback we get from, you know, us, the US market, um, where we're Arcadian is dual listed. Um, is really around the, the, the, the stress I suppose, on the balance sheet for for Arcadia. And now we've we've got ourselves comfortable that, um, the phasing of of the growth. Growth profile for our team that they can, they can fund, um, the development of these minds themselves. Um, but, you know, having a major like Rio involved, um, would, um, would obviously remove any of those concerns. Um, so, yes, I think it does make sense that, um, from Rio's perspective, that they, they take a closer look. And, Tim, can you say with any confidence of where we're at in the lithium cycle, you're willing to say perhaps you've seen the bottom?

8:45

Uh, that's always a pretty tricky one to call. And and, you know, macro markets is not our forte. We really try to understand business models and and try to find businesses that have levers to, to overcome, um, perhaps headwinds from, from the cycle and, and see many of those present in Arcadian uh, in terms of the, the broader, um, vertically integrated nature of the business. Um, and it's, um, it's advantage. Contracts with, um, OEMs directly. In the case of, uh, in the example of, um, the likes of Toyota and Tesla. Um, and so there's some downside protection afforded to them as a result of that. And that's been helping through this low, uh, part of the cycle. We're certainly in a low part of the, you know, phase of the cycle, whether at the bottom, um, you know, I think that's hard to hard to tell you. You know, our experience is that that low prices, um, you know, basically solve the low, uh,

9:45

of commodity cycles. And so we've seen that, that working away. But it really does just take time. Um, so, you know, low prices have been causing the supply side to begin to shut some capacity, uh, that's been coming out over the last few months, um, and incrementally, uh, in larger chunks. So that works away on itself. And, um, and then growth projects are either shelved or delayed. It's harder, obviously, to fund those without profitability of higher prices. And so without the same level of supply coming through, then, um, you know, similar amounts of demand at this relatively low point, um, begin to be more sustainable. Um, and then I suppose the news of the last few weeks, with interest rates being cut in the US and then, uh, stimulus from China. You know, you'd obviously say you're in a better place than you were a few weeks ago. Um, so that's it's probably about as, as

10:45

bullish as we'd we'd, um, would sort of want to be. But taking a longer term view is as we try to focus on, um, in, in the investing that we do. We really do see a huge opportunity, um, with the build out of the broader EV networks over many, many years. Um, for the lithium businesses, um, uh, and the mines within, within the Arcadian, um, asset base to, to continue to do very well.