Ambitious Allkem Ready to Livent the Lithium Dream

All sorts of boosterish angles appeared in print and online about the $US10.6 billion ($A15 billion) merger between Allkem and US group Livent and most of the them missed the main point – that rather than some desperate strategy to get bigger and grab US green subsidies (which is doubtful at the moment, as we will explain), it is a sign of the maturity of the Australian lithium industry that one of its players has had the confidence to go completely global.

Even though Livent is a well-known name in the small US industry, there’s still something David and Goliath about Allkem’s move to seek out and do a deal with America’s number 2 producer that will see the Australian company and its shareholders end up with more than 50% of the issued shares in the merged group.

The merged company – still to be named – will have a primary listing on the NYSE and maintain a foreign exempt listing on the ASX. Livent management will run the company, the chair will be former Woodside boss, Peter Coleman, who is chair of Allkem, and in the greatest of ironies, goes from being a fossil fuel fossil, to an evangelist for all things green and renewable.

In reality, Allkem is just following the path that local packing giant, Amcor did in 2017 when it bid $US6.8 billion for a big US rival called Bemis. That ended up shifting the merged company’s HQ and focus to the US, with an Australian foreign exempt listing and turned the larger Amcor into a true global giant.

BHP went down that route with the Billiton takeover at the start of this century and after years of wheeling and dealing it had built an ungainly global minerals company with not much focus and a lot of problems.

Eventually it took a punt on becoming globally big in a small number of commodities (iron ore, copper, nickel and potash) and shucking off its oil and gas to Woodside, and then ditching its UK listing and returning its primary listing to the ASX, while remaining the biggest globally – and then snapping up OZ Minerals in Australia for $A9.6 billion in cash.

Who knows, once the merged Allkem-Livent settles down and is whipped into shape, the likes of BHP, Rio Tinto or even the sluggish moving Glencore could get interested – they have the know-how, the financial strength and the interest to buy their way into global lithium.

For many investors and analysts, this merger is a move to grab some of the $369 billion on offer from the Biden administration’s Inflation Reduction Act of 2022 (IRA).

To get in the line for this money, the battery and renewable materials such as lithium, copper, nickel etc, have to come from the US or from a country with a free trade agreement with the US, such as Australia, Canada, Mexico and Chile, or countries where special agreements are being done, such as Japan and South Korea.

China is excluded and so is a country like Argentina (and Russia, and North Korea and Brazil).

But the reality is that this is both the lure for the deal and a potential deal buster – not enough Australian boosters of the deal understand this and they need to get some knowledge of the politics of Argentina and Chile, especially over the rest of 2023.

The deal’s eventual success will depend on the governments of Chile and Argentina where resource nationalism remains a powerful force and changing political forces in both countries as leftish governments slowly fade under pressure from high inflation crime, drought (in the case of Argentina) and a long history of radicalised right-wing politicians (think Peron in Argentina and Pinochet in Chile).

Because most of Allkem’s assets are in Argentina, the merged company start with a tilt towards that country, which makes early access to the IRA money problematic.

Allkem, which now calls Buenos Aires home following the 2021 merger of Orocobre and Galaxy Resources, has a portfolio of lithium chemicals operations including a lithium brine business in Argentina, a hard rock lithium outfit in Australia, a hard rock development project in Québec and a lithium hydroxide conversion facility in Japan.

The Australian, Canadian, and Japanese business will be right so long as they do not use Chinese produced raw materials.

Livent has brine production in Argentina, a hard-rock based lithium project in Quebec, and lithium refineries in the US and China. The company also has a supply agreement with German luxury carmaker BMW.

Canada and Japan will be OK, China and Argentina are not OK for the IRA money at the moment.

Argentina and its current left-wing government has gone out of its way to criticise the US in recent years, though a swing to the right in 2021 and then rampant inflation, could see the political makeup of the government change in national and Presidential elections to be held later this year.

That could change the approach of the Biden Administration. Certainly the political outlook seems to be changing especially with the terrible drought and rampant inflation (100% a year and more, destroying savings and the country’s middle class).

There’s a key test coming for the lithium industry in Argentina and that is what Rio Tinto decides with its $US850 million Rincon deposit where it is planning a $US148 million test expansion and mining pit.

But in its recent March quarterly report, Rio said that idea was now being reviewed, principally because of the cost pressures driven by the soaring rate of inflation in the country.

A decision on whether to continue or can the test until costs ease, will be known mid year from Rio but it is a big warning sign for the rest of the lithium industry in the country – including Allkem and then the merged company.

And then there’s Chile where the leftist government has already tried to impose higher taxes on the mining industry – led by copper (there’s a second vote a new copper tax next week in Chile’s Congress) and lithium where a vote on the proposed slow nationalisation won’t come until later this year.

But rightwing politicians now dominate a special tribunal of 50 members to take a second look at a constitution to replace the one bequeathed by the late dictator, General Pinochet. The first attempt has failed and the mining tax and lithium proposals are tied to the fortunes of the the tribunal’s redrafting of the constitution.

It’s a mess that only time and votes this year in both countries will make the future for mining in both countries clearer – and the big tas, in Argentina of halting inflation.

Instead of watching lithium prices in China, investors would do better to keep a close watch o0n the elections and votes in Chile and Argentina over the rest of this year. They will have a big influence on the outlook for lithum, as well as copper, and the future of the Allkem and Livent marriage.

And the Argentinian copper tax debate and eventual decision will impact the share prices of a host of local companies, led by BHP, Rio Tinto and South 32.

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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