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Tianqi to sell a stake in its Australia unit to IGO Ltd.

By: Yash Patankar, Alex Anderton, Jeevan Sembi, Jasper Kennett, Igor Chmielinski


Deal overview


Tianqi’s decision of selling a stake in its Australian unit to a local miner comes amid escalating tensions between Beijing and Canberra. The acquisition by IGO marks a change in strategy for the group, which recently said it would shift its focus to commodities used in the production of electric vehicles.


Company Details: Tianqi Lithium


Tianqi Lithium has world leading positions in its major businesses of lithium resource investment, lithium concentrate extraction and the production of advanced lithium specialty compounds. With resource and production assets located in the pre-eminent lithium regions of Australia, Chile and China, our fully vertical-integrated businesses ensure the Company is optimally positioned to partner with our international customers to support the long-term sustainable development of lithium-ion battery technologies for application in the electric vehicle and energy storage industries.


Headquarters: Chengdu, China

President and CEO: Jiang Weiping

Number of employees: 1 851

Market Cap: $76.38 billion

Enterprise Value (EV): $118.75 billion

EV/Revenue: 31.33x

EV/EBITDA: 75.94x




Company Details: IGO


IGO Limited (ASX: IGO) is a leading ASX-listed exploration and mining company with a strategic focus on high quality assets of scale and longevity, and an evolving strategy to align the business to the structural shift to energy storage.


Headquarters: South Perth, Australia

President and CEO: Peter Bradford

Number of employees: N/A

Market Cap: $4.94 billion

Enterprise Value (EV): $3.59 billion

EV/Revenue: 4.10x

EV/EBITDA: 8.95x



Background


IGO would take a 49% stake in Tianqi Lithium Energy Australia, giving it 25% ownership in Greenbushes - the world's largest hard-rock lithium mine - and a 49% holding in Tianqi's Kwinana lithium processing plant, both in Western Australia. Both Greenbushes and Kwinana are world-class assets with attractive growth profiles that together provide the platform for building a global lithium business, which aligns with IGO’s change in strategy to focus on commodities used in the production of EVs.


Debt-laden Tianqi, one of the world's top producers of lithium chemicals used in electric vehicle (EV) batteries is keeping its 51% ownership of its Australian unit. The proceeds from the deal with IGO will enable them to improve on their current low credit rating and weak liquidity; they will be able to repay the $1.2 billion principal on a loan taken out in 2018 to partially fund the acquisition of a 25% stake in Chilean miner Socieded Quimica y Minera (SQM) for $4.1 billion, which was originally due at the end of November 2020, but extended to 28th December 2020.


The acquisition of an interest in SQM was part of an aggressive global expansion aimed at securing leadership in the lithium market. It succeeded in putting China in a dominant position just as sales of electric vehicles (EVs) took off, but it came at a hefty cost for Tianqi. This is because the deal was closed when lithium carbonate prices were peaking at $17,000 per tonne. They have since plunged more than 70% due to a global oversupply of the commodity used in the making of batteries that power EVs and high-tech devices.




Synergies


IGO will be receiving a 49% stake in Tianqi Lithium Energy Australia and a minority stake in Tianqi's lithium hydroxide plant in Kwinana. Synergies associated with both this lithium mine and lithium hydroxide plant “provide the platform for building a global lithium business” said Peter Bradford, IGO’s managing director and CEO. This follows IGO’s commitment to tap into the battery materials sector ahead of an expected surge in demand and the clean energy transition gathers momentum. While the main drive behind the deal is to ease Tianqi’s financial woes; being their $1.2b outstanding loan, the acquisition would lower Tianqi’s asset-liability ratio and optimise capital structure, while still holding control of its core assets through Tianqi’s maintained majority stakes.



Risks and uncertainties


A big cost for Tianqi is the fact that they had to sell a stake in one of their most prized assets to be able to refund their debt obligations. Greenbushes is Tianqi’s first expansion outside of China, highlighting that “globalization is the key for our business”. However, with the first asset they acquired they have had to liquidate a 49% stake to fund their previous expansions. There are a few things to delve into here; the first is that this does not set a good precedent for international expansion for Tianqi. It is clear that poor budget management is the cause of this sale - the drop in lithium prices of roughly 70% across 2019/2020 caused a cash flow squeeze that affected their ability to unlever. This will have a material impact on their ability to raise funding for further global expansion. Who would want to lend to a highly leveraged Chinese company that has a downgraded credit rating of Caa1, with a history of having to liquidate some of their assets to just afford their debt?


Greenbushes mine, along with being regarded as one of the best lithium assets in the world, was also a way for China to have more of a choke-hold on global lithium supply, and the lithium-battery supply chain. Relations between China and Australia have weakened over the COVID period - Australia depends on China for a vast majority of their exports, especially commodities. Recently, the Chinese embassy in Canberra issued a 14-point memo on how it was the Australian’s fault for the deterioration in the relationship, causing further escalation. The sale of a stake in the world’s largest lithium mine gives up control of a large part of the world’s lithium supply, something that China will not take lightly.




Concluding Remarks


Tianqi’s key motivation behind this deal is the ability to ease their financial difficulties, as a potential collapse of Tianqi as an industry leader would rock the lithium industry, which has already seen Australia’s Altura Mining go into administration earlier this year. The deal will further enable Tianqi to improve their low credit rating and weak liquidity, helping them to fulfil their objective of supporting sustainable development of lithium-ion batteries, particularly as the world accelerates this transition in the coming years.


This will mutually benefit IGO, as gaining stakes in the world’s biggest lithium mine and a lithium processing plant provides the perfect platform for IGO to fulfil their evolving strategy to align their business to the structural shift to energy storage. This deal comes amid a series of lithium-based initiatives across the globe for mining companies to ready themselves ahead of the inevitable worldwide EV boom.


Lithium Market


At the time of writing this the price for a tonne of lithium in Chinese Yen is 67,500, or conversely about $4.74 per lb; with a YTD increase of 46.15% as shown below:









The sector in general has seen a massive increase in valuation, as mining firms’ revenues increase in direct correlation with the price of lithium. The largest lithium ETF, $LIT, which tracks both mining firms, producers, and other major firms reliant on lithium, has seen a 123.41% increase in the last 12 months. The ETF includes $TSLA, Gangfeng Lithium Co (002460 on SZSE), $ALB, etc.









The meteoric rise in value of Lithium and Lithium producing/mining companies can be attributed to the rise in demand for electric vehicles (EV’s). Lithium is one of the major components in batteries of EV’s, with each car containing around 22lb of the material. Recently, due in part to new regulatory conditions and a shift in public sentiment, EV’s are both cheaper and more mainstream than ever before. Tesla leads the market; as Tesla continues to become a dominant force its plans to expand would require ‘60,000 tonnes of Lithium’ for just one million cars. If we use this and apply it to a market of just 30 million cars worldwide this would create demand for 5x the amount of lithium produced in 2019.


This shortage will likely continue in the short term as expanding mining production is no quick or easy feat. The demand for EV’s looks set to continue trending upwards, likely pushing the price of lithium even higher. These high prices and high levels of demand will push firms to expand, meaning the level of M&A activity in the lithium sector will also increase as larger firms seek to gain more market share and mining assets. Lithium is essential to batteries, and many modern economies are moving to a battery-focused future, the level government encouragement is also set to grow (especially during the Biden administration), so I don’t believe there is much risk of lithium prices decreasing in the near future. It is only once mining capacity increases enough and EV’s have seen their demand stabilise that we will see more price stability (or declines) for Lithium.


The main long term risk for maintaining these high lithium price levels is the entrance of new technology posing a risk to lithium’s dominance in EV batteries. Graphene has many of the properties that EV manufacturers seek; it can last longer on tougher conditions than lithium and has the potential to store for energy if leveraged through a graphene-electrode as opposed to the lithium-ion cores we see in most batteries. Graphene has posed many issues to prevent its dominance, namely its density issues, but has the potential for quicker charging times and longer mileage off one charge. It remains to be seen but with the large amount of private and institutional investment into EV’s it seems plausible that there will be lots of innovation and research in this area. If graphene batteries become the new standard then we will likely see this short-term optimism in lithium fade away, replaced by new technology.


Lastly, it is possible that many EV firms will adopt the model of selling battery technology as a service rather than owning the battery pack inside of the car as a single purchase. Nio leads the space, offering the option to separate their cars from the batteries that power them. Batteries can be swapped regularly and the costs are reduced for consumers. Whilst it has many logistical and engineering issues Nio seems confident in this new approach, which will be able to make better use of the batteries that exist through reuse and replacement. If this trend becomes mainstream within the EV industry then the demand for lithium batteries will be less extreme than many expect, even if the EV industry experiences massive growth. So lithium prices may not match the expectations set out by some analysts who correlate lithium batteries and the EV market almost directly in their expectations about the future.


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