Rio and Patriot deliver much-needed festive cheer to lithium investors

The year concluding is one that the once-booming ASX-listed lithium sector would rather forget.

Prices for the key battery material were smashed for a second year in a row, with lithium carbonate down some 38 per cent.

A two-year comparison is even more alarming with prices off by close to 90 per cent from the peak levels of November-December of 2022.

Equity values have been smashed accordingly, and the Australian industry has either closed high-cost operations or reined in production plans to weather the storm.

But among all the gloom, there are some good reasons to think that 2025 could well be a turning point for the downtrodden sector.

And for that thanks needs to be given to Rio Tinto (ASX:RIO) and Patriot Battery Metals (ASX:PMT).

There has been a late flush of positive news from the pair, positive in the sense that while lithium prices remain depressed, the thematic of double digit growth in demand remains intact, and incentive (higher prices) will be needed to give the industry a shot at meeting the demand growth.

Think of it as both companies delivering a confidence boost to the entire ASX-listed lithium sector, an early Xmas present of sorts.

Rio’s $20 billion bet on lithium:

Rio has recently emerged as a lithium super-bull despite the naysayers, which include its arch competitor for the investor’s dollar, BHP.

While BHP has been busy angling to bulk up its copper growth options, Rio has declared M & A options in copper too expensive. Instead, it has gone boots and all into lithium.

It has plonked down $US10.02 billion ($A15.81b) in recent times building a major presence in lithium – the Arcadium (ASX:LTM) acquisition, the Rincon acquisition from a private equity group and its recently announced development.

To that can be added the $US1b or so that has been spent on its 2004 Jadar lithium-boron discovery in Serbia where fierce opposition has stalled Rio’s $US2.5b development plans.

So all up, Rio has and wants to spend as much as $US13.52b ($A21.3b) on lithium, creating a new growth and earnings division. The Arcadium acquisition also comes with a big annual capex bill for Rio to fire up its expansion plans across lithium brines in Argentina and hard-rock lithium in Canada.

On its own numbers, lithium is projected (at consensus prices) to account for 13% of Rio’s earnings in the longer term, helping to reduce its current 77% earnings dependence on iron ore to 47%.

It is a huge bet on lithium’s outlook , even for a company of Rio’s scale. The $US11b it has committed to date (including money sunk at Jadar) represents about 18 months of group profits, or 55% more than the $US7.1b paid out in dividends for 2023. Again, there is a big capex bill to accelerate the Arcadium projects under Rio’s ownership.

Needless to say, Rio is supremely confident its lithium bet will pay off. And it is pleased as Punch that it has been able to assemble its lithium position at a cyclical low in the key new energy commodity, even if the agreed bid for Arcadium required a 90% premium.

Rio’s lithium market expectation is that the current 1.2Mtpa lithium demand market will grow to 3mtpa-3.5mtpa by 2030, and more beyond. Without higher prices, the expansions and new developments needed to keep pace with the forecast growth in demand suggests a significant supply deficit is on the cards.

To the brave Dane behind Rio’s lithium adventure, CEO Jakob Stausholm, that has to be good for future prices.

Patriot:

Patriot Battery Metals (ASX:PMT) has added to the end of year cheer for the lithium sector by revealing it had secured the mighty Volkswagen as a strategic investor and offtake partner for its Shaakichiuwaanaan project in Canada.

The new alliance goes to the very reasoning behind Rio’s big bet on lithium – the world’s auto industry is going all electric and its demand for the battery material is growing at double rates, bringing on a near-term supply deficit that will fire up prices.

The big auto groups need to secure long-term supplies and to make sure their needs are met they are increasingly moving downstream into lithium raw materials to feed their upstream investments in gigafactories.

Patriot’s multi-syllable Canadian project fits the bill because of its world-class scale, high-grade and its proximity to the North American and European markets where supply chains are being built out at a rapid rate to ward off the China-challenge.

Despite its ownership of one of the biggest and best hard-rock deposits, Patriot was not immune to the great sell-off in lithium stocks in 2024. Its ASX shares are down 74% for the year, with the market over-looking Shaakichiuwaanaan’s credentials as one of a handful of projects capable of making a meaningful dent in the lithium supply challenge.

It is a point not lost on VW. It is investing $C69 million in Patriot for a 9.9% stake while its battery-making arm intends signing up for the supply of 100,000tpa of spodumene from Shaakichiuwaanaan, equal to 25% of planned production in a stage 1 development or 12.5% of stage 1 and stage 2 production.

The placement to VW was struck at $C4.42 a share, which was a 65% and 35% premium to the 30 and 90-day volume weighted average price of the Toronto listed stock.

Like the 90% premium in Rio’s bid for Arcadium, the premium to market being paid by VW says something about the disconnect between where the end-using industry sees lithium demand/pricing going versus the insipid take of equity markets.

Following completion of the feasibility study for Shaakichiuwaanaan, VW could contribute additional financing in support of the project in return for additional offtake on terms to be mutually agreed.

VW board member for technology Thomas Schmall said the investment in Patriot was a “significant milestone in our journey to a fully electric future”.

“We are not only securing key raw materials for cutting edge sustainable battery technology but also reinforcing our commitment to North America,” he said.