Rio Tinto Lithium (RIO) Earnings Call Transcript & Summary

Good morning to everyone in the U.K., and good evening to those of you joining from Australia. Thank you for tuning in. Before we start, I'd like to acknowledge and pay my respect to all traditional owners and First Nations, people who host our operation and Arcadium's operations around in the world. We are operating in a complex but exciting environment full of opportunities. I'm pleased to discuss one major opportunity today, Rio Tinto's acquisition of Arcadium Lithium. We have learned a lot about Arcadium -- about the Arcadium team in recent months. It is clear that we have complementary skills, shared values and a shared belief in the potential that can be developed from the Arcadium portfolio. I'm therefore delighted that the CEO of Arcadium, Paul Graves is here with me today. I'd like to welcome Paul and his leadership team and everyone at Arcadium to the Rio Tinto family, where I believe we can make Arcadium and Paul's vision a reality. Over to you, Paul.

Thank you, Jakob. Good morning, everyone. I'm thrilled to be here with Jakob and the Rio Tinto team. Our team at Arcadium, we've worked tirelessly to create a valuable lithium company and we have a very strong growth portfolio. And as we run this business, we're always guided by making the right long-term decisions for our company and our shareholders. Today marks an important milestone in our journey as we look forward to joining the Rio Tinto family. This transaction represents tremendous value for our shareholders, for our employees, our customers and our communities and host nations around the world. Rio Tinto's proposal offers our shareholders cash certainty today at a very attractive price against the inherent risks associated with the delivery of our business. And as a result, it has received unanimous support from our Board of Directors. Rio's vision for the energy transition and the importance of lithium as part of the solution really resonates with me. And when we put Allkem and Livent together to create Arcadium, we had our own vision. When I presented our updated strategy to the market last month, I didn't like cutting our capital and slowing down our growth. And looking ahead, we recognize that the best way to realize the vision is from our merger -- is with Rio Tinto. And it's in this new home that we will start accelerating our growth and bring this vision to reality. Together, we can unlock significant value and long-term success in the rapidly evolving lithium market. We're truly excited about the future and we look forward to the many opportunities that lie ahead. So back to you, Jakob.

Thank you, Paul. We will now give some more background to the transaction before we take Q&A. Lithium is one of the cornerstone materials needed to support the energy transition. It's heavily leveraged towards electrical vehicles and energy storage accounting for more than 80% of global production. And over the next 20 to 30 years, it is expected to remain the preferred material for battery energy storage. This is due to its unmatched energy density, efficiency, delivery at high power levels and owing to its fundamental chemical properties compared to other elements in the periodic table. Beyond lithium, Rio Tinto supplies aluminum, copper and iron ore for steel production, which make up over 40% of the materials content of the battery. Indeed, we are the Western world's largest producer of aluminum, and we are expected to account with 25% of the growth in global carbon supply in the next 5 years. So today is symbolic as lithium foils are moving -- are the moving parts between the cathodes where the aluminum foil is used as the positive electrode and the anode where copper foil is used as a negative electrode in a battery. By shaping our portfolio with a focus on these materials, we are delivering on our purpose of finding better ways to provide the materials the world needs. We have been consistent in our belief in the long-term outlook for lithium with an expected market deficit emerging from the end of this decade and a double-digit growth rate until 2040. Lithium is one of the fastest-growing markets today and is expected to reach an even greater scale in the coming decade. We have been saying this for many years that we want to build a lithium business. But we wanted to build it at the right time and as competitively as possible so we create maximum value to our shareholders. We have been patiently studying the sector for a long time. Ever since, in fact, we discovered Jadar 20 years ago to decide the best way to enter the market and develop a lithium business of relevance and scale. Applying our disciplined capital allocation framework now is the right time to acquire a premium lithium business. Through this transaction, we are bringing Rio Tinto's scale development, capability and financial strength to an already very strong Arcadium portfolio. Arcadium brings leading technologies such as direct lithium extraction that it pioneered, which together with our investment in the technology creates a world leader in DLE. They have proven downstream capabilities, delivering the highest quality products. They also have deep commercial customer relationships and Arcadium brings the world's largest lithium resource base from Tier 1 assets; large, long-life, low-cost and expandable. We have complementary geographical footprints and share rich experience operating in Argentina and in Quebec, Canada where we plan to establish world-class lithium hubs benefiting from economies of scale and deep local knowledge. And we believe that inside Rio Tinto, we can improve and accelerate Arcadium's development pipeline with our project delivery capabilities while offering strong and stable financial backing, enabling us to plan for the long term to deliver the optimal growth pathway. This transaction gives us the platform to create the world's leading lithium business in the next few years. Rio Tinto already have one of the highest growth stories with copper. With Arcadium, we are positioned to have the world's biggest growth story for lithium. Paul will now tell us more about the business.

Thanks, Jakob. So let me provide a quick reminder of who Arcadium is. We were formed from the merger of Allkem and Livent at the beginning of this year. This merger created a unique global vertically integrated lithium chemical producer with the widest offering of lithium chemical products. Our world-class resources and manufacturing network is backed by a broad technology portfolio with expertise in all major forms of lithium extraction and processing. In Argentina, Arcadium has a vast network of low-cost lithium brine operations with long resource lives, which are expected to remain operational for generations. And these operations are supported by downstream chemical processing plants across the globe, making Arcadium one of a handful of truly integrated producers of lithium chemicals. Additional brine resources are under development in Argentina, close to Rio Tinto's Rincon project and hard-rock mines are under development in Quebec, close to Rio's Canadian operations, and these assets will benefit from Rio's existing footprint. Our technological leadership in direct lithium extraction is also extremely attractive. It complements Rio Tinto's technology development at Rincon and its Bundoora Technical Development Facility in Australia. And one of the strengths our customers value is that we look to develop processes and products that are aligned with their own strategic plans. We're investing in next-generation process and application technologies to stay close to customers and to maintain market leadership. We strive to improve the efficiency, the cost, the flexibility and the sustainability of our existing and future operations while creating new applications and market opportunities for lithium. Good examples of this work include our continued investment in LIOVIX, printable lithium on the Li metal -- lithium metal technology, both of which are focused on the future trend of increasing lithium metal content in lithium-ion batteries and ultimately, the move towards solid-state lithium batteries. We're also investing in next-generation DLE technologies through ILiAD. Deploying ILiAD technology in the future will allow us to improve our sustainability footprint using less energy, less water and less land while recovering a significantly higher proportion of lithium than conventional technologies. And this investment supports our customers' desire for the most responsibly sourced lithium possible. We have well-established commercial relationships with blue-chip customers, including Tesla, Panasonic, BMW, General Motors and Ford. Our deeply embedded customer relationships have been built over many years. The diversity of product range and our proven reputation for producing high-quality product and the fact that we have a more diverse and therefore more robust supply network makes us a partner of choice for major lithium consumers globally. And it is these relationships that have allowed us to develop the long-term customer contracts, which have helped us to outperform in challenging markets like today. Thank you. Back to Jakob.

We have been developing our lithium strategy for many years. We have carefully evaluated how we can find better ways to deliver the lithium the world needs in a manner that is supported by society that respects local communities, minimizes environmental impacts and delivers value for our stakeholders. Arcadium brings the #1 lithium resource base in the world; Rio Tinto helps unlock it. Arcadium has deep downstream and commercial experience; Rio Tinto has deep upstream and project development experience. Together, we have the foundation to create the leading lithium business. As you would expect, we continue to maintain our disciplined approach to capital allocation which has led to our very robust capital structure and strong balance sheet, enabling us to undertake this transaction and fund this growth. This transaction will grow our earnings and therefore, grow our dividend through the cycle, creating value for shareholders over time. \Our dividend policy is unaffected, and we remain committed to honoring our current policy and practices. A few details on the transaction itself. We are acquiring 100% of Arcadium for consideration of $5.85 per share to be paid in cash. The transaction has been unanimously approved by both companies' Boards of Directors. Given Arcadium's legal structure, the acquisition is to be implemented via a Jersey scheme of arrangement and is subject to both Arcadium's shareholders vote and customer regulatory approvals. We expect the transaction to complete in the middle of 2025, subject to the receipt of regulatory approval. It will be funded from existing liquidity and the availability of Rio Tinto capital from closing, will allow for the acceleration of project delivery. In summary, at Rio Tinto, we have been finding better ways to provide the materials the world needs for more than 150 years. We look forward to applying our learnings and experience to Arcadium's base of Tier 1 assets as we continue our journey to be the best operator and excel in development with impeccable ESG to maintain our social [ license ]. Together with Arcadium, our combined technological capabilities position us to become market leaders in DLE and lithium processing. And we see value in creating lithium hubs in Argentina, where Arcadium's assets are located near Rincon. And in Canada, where we have significant presence through our aluminum, iron ore and titanium businesses. Our financial strength and project delivery expertise will enable the acceleration of Arcadium's growth pipeline, creating significant value. Rio Tinto is the right home to unlock Arcadium's incredible potential. This is how you create a truly world-leading lithium business with the right assets at the right time and with strong capital discipline. This transaction will ensure a reliable, low-cost and sustainable supply of commodities that is critical to the energy transition. We'll keep you updated with key information as the transaction develops. I now welcome the opportunity to answer your questions or both Paul and I. The operator will now take the first question. Thank you.

[Operator Instructions] And your first question comes from the line of Liam Fitzpatrick from Deutsche Bank.

I'll stick to 2 questions. The first one is just on the growth target. I just wanted to understand if Rio is supportive of and will it stand behind the targets that we recently heard from Arcadium including the EBITDA target out to 2028? Or could these change quite materially post completion? And then also, if you have any comments on what this means for your own organic lithium projects? And then the second question, just on the dividend. I heard your comments there, Jakob, on the policy, but the policy is quite a wide range of 40% to 60%, and you have paid out a minimum of 60% for a number of years now. So can you confirm that you'll maintain the 60%? Or is there a chance that it could drop below that for a period?

Yes. Thank you, Liam. Let me take your second question first. Every year, twice a year, the Board of Directors makes a discretionary decision on dividend, of course. But if you listen very carefully to what I said, I said we want to honor the policy and practices of the dividend distribution. So yes, I would very much like to honor that. But obviously, it's subject to individual board decisions. And then back to the lithium business. It goes without saying when you say EBITDA -- EBIT target that Arcadium has certain price assumptions, we might have different price assumptions. What is really key for me, and maybe Paul wants to comment on this as well is, how can we get the project schedule back to the accelerated path at the time of the merger of Allkem and Livent because lately, of course, Arcadium have had to preserve cash and therefore, not accelerate it as fast.

Yes. Look, I think there's clearly within Arcadium, 2 projects that we've elected to move more slowly. And if we were to accelerate those projects, it brings about another 50,000 tonnes of lithium product in the form of spodumene or carbonate online, 2 years quicker than was in our plans on Investor Day. We also have additional expansions, which I'm sure you'll recall from our Wave 2 that can also be brought forward into Wave 1. And so we clearly are extremely keen to find ways to accelerate the projects that within Rio, we can that as a stand-alone company, we cannot. But within Rio, we will be able to accelerate them. And all other things being equal, of course, that will significantly enhance profitability over the next 5 years.

And your next question comes from the line of Alain Gabriel from Morgan Stanley.

Firstly, I have a question on your -- Jakob, that's for you on the broader lithium strategy now that you've got the scale as you combine Arcadium's assets with your own assets in Argentina and Serbia, how much do you need to spend on lithium growth CapEx from now until 2030, give or take? And how does that tie in to your $10 billion CapEx budget going forward? Is there some upside to that $10 billion and below in light of today's announcement? That's my first question.

Yes, a couple of important points. First of all, Livent's \-- sorry, Arcadium's -- apologies. Arcadium's CapEx is actually only around 5% of the CapEx of Rio Tinto. So it's not something that materially changed the overall ceilings or guidance we have given on CapEx. So I'm not coming up with new guidance. We stick with our guidance. And then actually, and I -- apologies, I should have answered that in the previous question, our existing assets. We got Jadar and we got Rincon. Rincon is focusing extremely well and will produce first lithium this year. And we believe that well, the feasibility study is also progressing very well, and we believe that we can get to a sanctioned decision by the end of this year, which will be another material investment into Rincon to bring it to full scale. Now the timing of the development of Jadar is a little bit more uncertain. And you might have seen that there is a parliamentary debate this week in Serbia about lithium extraction. We are very committed to the project, but we also have to accept that it's a societal choice. So let the public debate happen, and we are there to develop it. It's a tremendous resource. Thank you.

And my second question is that you're placing nearly a $10 billion bet on lithium. If you include today's acquisition and your CapEx plans for Rincon and actually Jadar, how much confidence do you have in today's cost curves? And how flexibility do you have to scale down your spending if the cycle proves to be -- or if the cyclical downturn proves to be longer or deeper than what you had expected?

I would describe Arcadium's business as a business full of optionality. I don't think too much about the impact on the short term because we really think long term about this -- around this development. And we have actually, during the whole year, and I'm sitting here -- standing here with colleagues who have worked extremely hard the whole year to try to look at every single lithium project in the world. And that has given us the confidence about what we want to be part of and what we don't want to be part of. And we became more clear that we were very keen on not just developing a spodumene business, but rather produce battery-grade lithium. We also realized that in Latin America, you probably find the lowest part of the cost curve. And therefore, we like the brines, we like the more exposure to Argentina. I would say the hard-rock opportunities in Canada are very attractive to us as well. So it was not kind of us looking at Arcadium, we were actually just looking at the whole industry and find out what are our criteria and then suddenly, we realized Arcadium have had the perfect match for us. And therefore, I'm super happy where we are today.

Your next question comes from the line of Kaan Peker from RBC.

Just wondering, with the acceleration of Arcadium's growth pipeline, how do you consider the market implications or the impact on volumes? I'll circle around for the second one.

Yes. Maybe -- I'm actually very curious to hear Paul's view on this, but I would say one thing that is very important. That's the mantra of Rio Tinto through decades is, we believe in the cost curve. And what we believe is we are bringing things at the low end to the market of the cost curve. And then there might be others who are bringing more expensive in and it might be difficult for them, but we feel very comfortable with the projects we have looked at.

I think you've got to kind of get some sense of scale to the question. Lithium demand globally this year is probably about 1.3 million, 1.5 million tonnes. By the end of the decade, it's going to be 3 million, 3.5 million tonnes. The expansion needed to meet that cannot all be done with low-cost production. And so there has to be high-cost assets being added to the market. I know easy to think that accelerating our projects is in somehow or some way add more supply. This market is going to be undersupplied by the end of the decade, particularly when prices stay where they are today. And the cost curve, we believe, is only going to get steeper. It's incredibly difficult to bring low-cost resources on from scratch. We're fortunate that we're not doing it from scratch. We're up and running in 3 different resources and very soon 4 different resources. So the advantage we have to bring on low-cost while the rest of the industry is going to have to bring on high cost, we feel very confident there's plenty of scope for more rapid and larger expansion of low-cost resources like ours.

Sure. And the second one, given the premium paid, could you provide guidance on synergies you're trying to achieve? And where do you see those synergies really being generated? Is it in Canada or Argentina?

Yes. The way I look at it here is value and premium is a little bit of a strange concept because the premium is high compared to the share price last week. It's actually a discount. If you go to the beginning of the year or you go a year back. It's just been a very volatile journey, the share price of Arcadium. What we have been discussing, and this has been a very robust discussion, I have to say, until late yesterday, has, of course, been what is the intrinsic value. We pay a full and fair value. It's good news for the Arcadium shareholders, but we can really create over and above that. And I didn't lay it out in numbers, but I laid it out in terms of structure in the presentation I just gave. I will just say to you the full potential of this portfolio if it's executed well, I have no doubt that it will generate a lot of value to the Rio Tinto shareholders. And it really doesn't come down. So, in fact, if you think about it, it grows so much that actually a lower price right now might actually be good. What really matters is that the cost curve kicks in and gives the right cost -- the right price over the next decade or so. And we are very confident about that. We have spent a lot of time analyzing this.

Your next question comes line of Rob Stein from Macquarie.

Look, the main question I have is really around synergies related to technology. So Rio has invested a lot in DLE as has Livent and Allkem. And when you sort of put that all together, what does that realize in terms of production synergies or cost synergies? That's a 3-brine operation in Argentina or 4-brine operation, I should say, in Argentina.

Well, first of all, and I'll let Paul talk about the technology because he knows more about it than I do, but I've actually studied it quite a lot and spend enormous amount of time with our people. And I spent a week in Argentina looking at it the first hand this year as well is, if you just take a step back, you are having a small lithium industry today, and you have a lot of still the traditional ponds solution. If you want to scale that up in Latin America, I mean you're going to destroy the enders if there's going to be ponds all over. The DLE technology is a way of reducing your nature footprint. And the technology is developing all the time, and it is actually the solution to provide the lithium that the world needs. And don't forget that it was really Arcadium that started it many, many years ago. You were the pioneers of it. And we are the fast follower and bringing our research people together with your people, we already had a first little event last week, there's a lot ahead of us. And we haven't explored it fully yet. There is the right technology, but there's also a tremendous technology development journey ahead of us.

Yes, look, I think it's important to understand that extracting lithium carbonate from brine is not a single step process, easily 20, 25 steps in that process. And DLE fits into a flow sheet into a process. So it's really important to have the know-how how the entire process works and how the different DLEs interact with specific brines, specific environmental conditions. The key to unlocking initial implementation of DLE tends to be that know-how plus infrastructure. But once you have unlocked it, it's incredibly quickly replicable. And so it allows you to expand much more quickly. And so when you think about synergies, I think this opportunity to bring our know-how and our DLE with the -- if you will, the unlocking potential of the ability to invest more quickly in the infrastructure. It just makes a massive difference to the ability to bring resources on. And most importantly, it's not just bringing them on. It's the ability to then just -- we call it copy paste. It's just copy paste, copy paste and you can expand as quickly as you need to, once you have that flow sheet running and once you have the infrastructure in place.

So maybe just a quick follow-up. This is my second question. With, I guess, a lot of that IP and technical know-how fitting inside people, so to speak, Rio Tinto, like how are you going to maintain the workforce, the know-how, the capability within Arcadium's footprint? And how do you create a culture that Arcadium has and Livent and -- or Allkem had before in the structure of a big company?

Yes. Look, that's our mutual challenge and -- but I just -- this is not a kind of a merger where you bring 2 companies together and talk about synergies by taking out a lot of people. No, this is -- we need everyone here together to actually accelerate development, accelerate technological development. People find that exciting. I'm absolutely convinced about that. And I think when we look at each other, we believe that people really want to work in this future entity.

Yes. Livent has been through this a couple of times, first of all, spinning out of FMC and then merging with Allkem to trade Arcadium, and now stepping into the Rio Tinto family and every step of the way the employees are excited by what it provides for them. They love the business. We have people that have been in the organization for 26, 27 years. We've been operating in Argentina for 27 years. We still have employees number, I think, 2, 3 and 4, still work for us. We still have people in Bessemer City that have just retired after 45, 50 years there. They don't -- they just want to be able to do their jobs. They're passionate about lithium. They're really excited about the growth in front of them. And I am highly confident that they will all be super excited by what opportunities Rio can afford for them. So look, clearly, every individual is different. But I think this is a great opportunity for the Arcadium employees. I really do.

Your next question comes from the line of Glyn Lawcock from Barrenjoey.

I just listened to you explained the deal is pretty compelling in what Rio can bring to Arcadium's assets, and I guess, the resource base. Was any consideration given to using scrip, not cash? I guess, so Arcadium shareholders can come along for the ride, but also so where the dividend potential of Rio shareholders is not put at risk as well?

I must say we didn't discuss that much because it just adds a layer of complexity. And Glyn, it's a very good point, but at the end of the day, it's 5%, 6% of the market cap of Rio Tinto. So at that level, normally, you don't make a scrip, and we have such a strong balance sheet. So it's not going to make a material difference from our point of view. So we -- when we became clear about that the perfect match for us was to get into Arcadium, we focused in on a cash deal and we focused discussions very well around the cash deal and therefore didn't choose to open up for further complexity. We are really happy to get Rio Tinto's share.

Anybody who really wanted that can just take the cash and buy Rio shares, not difficult.

No, I appreciate that. I appreciate that. But it feels like one side wins and gets cash out, the other side has to play for the long game. Is there any thought though, Jakob, then you are going to be at $12 billion net debt pro forma from the acquisition. You haven't been at that sort of level since 2016, so 8 years ago. Would you consider -- I know you've got your wagon wheel that you use for capital management and dividend is one, but what about issuing shares as well if you need to? Is that, I guess, another consideration?

No, it's -- I mean it's a super good point. It's a little bit beyond this transaction. I should probably have said on this transaction we never know where we are in the cycle. I would argue we are not at the top of the cycle of lithium right now. Assuming that we are at low end of the cycle, if you want to do anything countercyclical, you actually have to use cash to get that counter cyclicality into it. But you're making a very good point, and we have some optionality because we got the DLC. So you start getting me thinking. And to be quite frank, I have been thinking a little bit before but I don't think it's necessarily is that related to this deal. And Glyn, the thing I would like to just highlight as well is Rio is getting much, much more cash generative now. Of course, we have the enormous cash generation from our iron ore business. But don't forget, we have for a long period of time, invested heavily in copper in Oyu Tolgoi. That investment has been done and now it's ramping up. So we see every quarter more and more free cash flow there. And therefore, I actually feel very comfortable with the balance sheet post closing with Arcadium.