China to Secure One-third of Global Lithium Supply: Talison Buyout Finalized

Battery Metals

The acquisition of Talison Lithium by a privately owned Chinese firm with state-owned affiliates was completed on March 26, giving the Asian powerhouse control over one-third of global lithium supply.

On March 26, the remaining outstanding shares of Talison Lithium (TSX:TLM) were acquired by Chengdu Tianqi Industry Group. With the finalization of the takeover transaction, the privately owned Chinese firm and its state-owned affiliates have gained control of roughly one-third of the world’s lithium supply.

For Talison investors, the finalized transaction is certainly positive. However, the overarching issue — as evidenced by Tianqi’s acquisition of such a large chunk of global lithium supply — is an entirely different matter: consolidation.

How did we get here? 

Talison Lithium is a leading global producer of hard-rock lithium that operates the Greenbushes mine in Western Australia. In recent years, Talison has doubled its lithium production capacity in anticipation of the swelling battery market, capturing the attention of lithium market players vying for the biggest piece of the lithium pie. In August, Talison became the target of an all-cash takeover bid by Rockwood Holdings (NYSE:ROC). However, as we reported in November of last year, a last-minute offer of $7.15 per share from Tianqi called into question the certainty of the Rockwood deal.

In early December, Talison entered into a definitive agreement that allowed Tianqi to acquire the remaining outstanding shares of Talison for $7.50 per share in an all-cash transaction. The transaction values Talison at C$847 million, a significant increase from Rockwood’s original offer of C$724 million.

Industry consolidation

“There are those that believe that Tianqui overpaid for Talison, but the Chinese don’t care about the price — they want control of the commodity,” Chris Berry, founder of House Mountain Partners, told Lithium Investing News in an email.

Consolidation, Berry said, is something that we are likely to see more of in the lithium space.

“The industry is going to get smaller, with fewer companies needed, unless we see a sustained spike in lithium demand — something I view as unlikely, ” Berry said. “The lithium market is really an oligopoly and is fully supplied by the few producers at the top of the supply chain.”

China and supply security

Tianqi’s acquisition of Talison is an example of the measures China is taking to secure its grip on a steady stream of lithium supply. Leading up to its bid for Talison, Tianqi was given the green light from China’s Foreign Investment Review Board (FIRB), as well as approval from the country’s main regulatory body, the National Development Reform Commission. However, after announcing those approvals, Tianqi revealed that state-owned China Investment Corporation would provide $300-million of long-term equity for a 35-percent noncontrolling interest in Windfield Holdings, the Tianqi subsidiary used as a vehicle for the Talison bid, The Australian’s Bryan Frith reported.

Frith notes that these events have FIRB watchers concerned that Chinese state-owned firms have found a way to obtain approval for acquisitions by using privately owned firms as bidders. In the case of Tianqi, the issue is that following the approval of the original bid, the terms of the transaction were altered to allow China Investment Corporation to provide financial backing for the acquisition despite the fact that “[f]oreign investments proposals by government-owned entities receive special scrutiny” and such entities “are supposed to obtain prior approval before making a direct investment of any size in an Australian company.”

In successfully outbidding Rockwood Holdings, Tianqi has ensured Chinese control over a significant portion of the lithium market, which according to Berry is the main goal for the Asian powerhouse. “Tianqi was Talison’s largest customer and could not allow such a valuable asset to fall into the hands of a competitor [Rockwood],” he stated. “China aims to control the entire supply chain from mining to manufacturing of end products. This not only creates jobs, but creates Western dependence on Chinese goods. A great example of this is in rare earths.”

Where does this leave Rockwood?

Berry explained that while it is crucial for Rockwood to secure its own supply of lithium, “Rockwood has quality assets in Nevada and in South America currently, so I think the bid for Talison was a ‘nice to have’ rather than a ‘must have.'”

Though Rockwood’s bid for Talison has been knocked off the table, it remains to be seen whether the company will make a play for another lithium company. As of the end of 2012, Rockwood was sitting on $1.3 billion in cash, waiting for the Talison deal to fall through.

 

Securities Disclosure: I, Vivien Diniz, hold no direct investment interest in any company mentioned in this article. 

Related reading: 

Talison Lithium Deal Not in the Bag for Rockwood After All

Lithium News Round-Up: What’s Shaping the Sector

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