How Rio Tinto's $9.9 billion lithium gamble could pay off
By Dale Gillham
Did Rio Tinto overpay with its $9.9 billion acquisition of Arcadium Lithium, or could this bold move be one of the best deals we've seen in recent times?
Paying a 90% premium over Arcadium's recent closing price might seem hefty, but Rio is clearly banking on the long-term growth of lithium, which is projected to become a $10 billion annual industry. To assess whether this was a smart play for Rio, let's break down the key components of the deal.
First, let's consider what Rio actually acquired. Beyond Arcadium's vast mining operations, the true value lies in its advanced extraction technology, which could be a game changer.
Add to that the fact that lithium prices are currently hovering around all-time lows, and the timing of this deal starts to look spot on. If lithium prices bottom out and begin to rebound, Rio stands to benefit not only from Arcadium's operations but also from a higher market price for the commodity. If this scenario unfolds, it begs the question: is Rio currently undervalued?
Since mid-2021, Rio has been trading sideways, struggling to break through its July 2021 all-time high, despite several attempts this year.
This extended period of stagnation has likely caused some investors to doubt the stock's upside potential. However, with one of its strongest monthly gains in September-its best since late 2022-Rio could be setting up for a breakout to new highs.
For that to happen, the stock will need to push above the $131 mark soon.
If it doesn't, the recent bullish surge from September may prove to be more speculative than solid. Still, with this major acquisition in play and increased buyer interest, Rio presents a potential trading opportunity. I'd recommend keeping a close eye on both Rio's stock and the lithium price for signs of upward momentum.
What are the best and worst-performing sectors this week?
The best-performing sectors include Financials, Information Technology and Consumer Discretionary, all up over 2%. The worst-performing sectors include Energy, down over 2%, followed by Materials and Real Estate, both down more than half a per cent.
The best-performing stocks in the ASX top 100 include Arcadium Lithium, up more than 98%, followed by Block Inc, up more than 5% and Pro Medicus, up more than 4%. The worst-performing stocks include Pilbara Minerals, down more than 4%, followed by James Hardie and IGO Limited, both down more than 3.5%.
What's next for the Australian stock market?
This week saw the buyer's return, lifting the All-Ordinaries Index by just under 1%. However, volatility has noticeably decreased compared to last week, raising the question of whether buyers are becoming more cautious at these levels.
One reason for this caution is the escalating conflict between Iran and Israel, which could blow into full-scale war at any moment.
Additionally, in China, the initial excitement over stimulus measures is waning as doubts grow about their effectiveness in reviving consumer sentiment. Talks of more stimulus at the upcoming fiscal policy meeting on October 12 are already circulating.
These developments negatively impacted the Energy and Materials sectors this week, but Financials and Information Technology, which had recently declined, have now reversed and are trending upward.
As I noted in last week's report, I expect the All-Ords to retrace for a week or two after its four-week rally. However, despite global uncertainties, the index is holding above last week's low and is consolidating within a tight range.
This signals a bullish outlook, as sellers haven't been able to push prices lower, even with all the reasons to do so. If the market closes the week within last week's range, expect increased volatility next week. If the volatility breaks to the upside, we could see a quick push toward the 8600 to 8700-point level.
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