Why Rio’s Interest in SQM Makes Sense

November 10th, 2017 by Trefis Team
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Rio Tinto

Rio Tinto (NYSE:RIO) has recently announced its interest in the  acquisition of a 32% stake in the world’s leading lithium producer, Sociedad Química y Minera (SQM). [1] The $4.5 billion valued acquisition, if successful, would significantly add to Rio’s top line, given the favorable market condition for the metal.

Lithium is a major component used in the production of lightweight and high energy density batteries. Lithium-ion batteries are a preferred choice in the production of hybrid electric vehicles (EVs) and portable consumer electronics. Lithium has surged close to 64% since the beginning of the year, given the increase in production and demand for electric vehicles due to the growing concerns over environmental sustainability.

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China, which is the world’s largest consumer of lithium and currently struggling with alarming levels of pollution, has shown a significant rise in its demand for EVs. The economy saw a 53% increase in its demand for EVs in 2016 when compared on a Y-O-Y basis. [2] Demand for electric vehicles are expected to account for 54% of new car sales and add 5% to global electricity consumption by 2040. [3] This would require approximately a 2,900% increase in the current production level of lithium in order to sustain the demand. [4] The shaping of this demand environment would be dependent on various interdependent factors such as the fall in the prices of batteries, development of charging infrastructure for EVs, availability of variants of EV models, and government incentives provided to set up EV plants and infrastructure.

Rio has limited exposure in the production of lithium with its only stake in a lithium-borate project in Serbia which is currently at its early development stage. SQM produced 44 million metric tons of lithium in 2016 [5] and is accounted for as one of the largest global producers of lithium. Thus, Rio’s stake in SQM would add significantly to the company’s revenues owing to the favorable demand condition for lithium across the globe as environmental concerns prevail.

We have a $45 price estimate for Rio Tinto, which is 8% below the current market price.

Have more questions about Rio Tinto? See the links below.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Rio Tinto
Notes:
  1. Rio Tinto joins race for stake in world’s largest lithium miner, Mining.com [↩]
  2. China Is Leading The World’s Boom In Electric Vehicles — Here’s Why, Forbes [↩]
  3. Electric Vehicle Outlook 2017, Bloomberg New Energy Finance [↩]
  4. Lithium Prices To Stay High To 2024-UBS, Seeking Alpha [↩]
  5. Sociedad Química y Minera de Chile S.A. Annual Report 2016, SQM website [↩]