Mining giants have underestimated the lithium wave

WHILE the market for electric-battery materials was booming, one group of investors stayed on the sidelines: mining giants.

That seems surprising. Firms such as Anglo American Plc, BHP Group, Glencore Plc, Rio Tinto Group, and Vale SA got where they are today by spotting whatever commodities would see strong demand and weak supply in future, scouring the world for the best resources, and watching the money roll in.

A decade ago, the likes of lithium, cobalt, and graphite were minor materials, affected less by electric vehicles than the markets for lubricants, drill-bits, and smelting equipment. Nowadays, battery demand is so intense that rising prices risk holding back the energy transition, and major industrial consumers are rushing to lock down supplies. There are few better ways to finance the multibillion-dollar investments needed to decarbonize our economies than letting the balance sheets of giant companies loose on the problem — so where have the major miners been?

Mostly absent from the scene.

Anglo American, BHP and Vale have shown no interest in battery materials beyond their existing suite of elements, with the first two notably cool on the prospects for lithium in particular. Glencore invested this month in an electric-battery recycling business, but has shown no interest in digging up fresh supplies. Only Rio Tinto has made efforts to drill for the commodity, with a deposit rich in borates (a product it already mines) whose license was canceled last year by the Serbian government.

Recent dealmaking suggests they may have underestimated lithium’s potential. The merger announced last week between Allkem Ltd. and Livent Corp. will create a business that would have had $1.2 billion of earnings before interest, tax, depreciation and amortization (Ebitda) last year, on an impressive 63% margin. Combined, the two will almost certainly boast a market capitalization north of $10 billion, the fifth lithium miner to reach that level. Albemarle Corp. and Tianqi Lithium Corp. have been repeatedly turned down in recent months in offers for Australian early-stage producers.

That gives the lie to one argument frequently made by major mining companies (and repeated, to be sure, by this columnist): That battery elements simply constitute too small a market for a materials giant to bother with. Within just a few years, most potential takeover targets in the lithium space have gone from being too small to attract attention to being too large to digest. The most bruising battle currently under way in the mining industry, Glencore’s offer for Canada’s Teck Resources Ltd., involves a target whose enterprise value and Ebitda are in the same ballpark as the big four lithium miners.

There are valid reasons why the big end of town remains wary of lithium. Many of the largest players are out of the question as M&A targets. China’s Tianqi and Ganfeng Lithium Group Co. are off-limits thanks to laws barring foreign investment in mining, while Sociedad Quimica y Minera de Chile SA, or SQM, is also a hard target given large stakes controlled by Tianqi and its former chairman Juan Ponce Lerou.

You can add to that the fact that the lithium market itself is small and volatile. Chinese prices of lithium carbonate have fallen by about two-thirds over the past six months, though they linger about 50% above 10-year average levels. The viability of developing new mines depends on whether the world remains in deficit over the next decade — a situation that would be good for producers, since it would push up prices — or slips into surplus, crashing the value of investments.

Still, the reluctance of major mining companies to get involved in the biggest growth market for materials this decade represents a paucity of vision. Lithium carbonate demand is likely to quadruple by 2030 to more than three million metric tons annually, representing a $90-billion market at current prices. It should grow yet further over the coming decades, as the energy transition gathers pace.

One way to solve the immaturity of the market — the most fundamental factor that diversified miners point to in justifying their doubts — is precisely for larger companies to get involved. At present, no players in the lithium space have the financial capacity to invest against the grain, spending more when prices are low and less when they’re high.

However, that capability is precisely what ensures the world has relatively stable markets in commodities from crude oil to copper and iron ore. The large balance sheets of Saudi Arabian Oil Co., BHP, Glencore, and others help to shave the peaks and troughs from the inevitable cycle of commodity prices.

If they want to see lithium become a commodity with similar abilities to churn out reliable cash flows year after year, the biggest mining companies are going to need to get involved.