Albemarle’s Offer to Acquire Liontown Rejected

On March 27, Albemarle ALB announced it made an unsolicited offer to acquire Liontown Resources at a price of AUD 2.50 per share in cash. The proposal was rejected by Liontown’s board of directors. With no deal agreed upon at this time, we maintain our $350 fair value estimate and narrow-moat rating for Albemarle. At current prices, we view Albemarle’s stock as undervalued, trading at more than 35% below our fair value estimate.

Liontown is in the construction phase of its first lithium hard rock resource, Kathleen Valley. The project plans to produce 3 million metric tons of lithium concentrate, which we estimate could be converted to roughly 375,000 metric tonnes per year of lithium chemicals on a lithium carbonate equivalent basis. Based on the project’s development study, it is estimated to be the fifth largest hard rock resource in Western Australia, behind Albemarle’s two current resources, Greenbushes and Wodgina, with an above-average lithium concentration. This should put the resource on the lower half of the spodumene cost curve.

Strategically, the acquisition of Liontown makes sense for Albemarle. It would provide Albemarle with a third high-quality hard rock resource. This would allow Albemarle to expand its downstream lithium chemicals production while remaining a low-cost, fully integrated producer, which underpins our narrow moat rating. The bid also confirms our view on the industry that fully integrated lithium producers with high-quality resources are the most likely to generate excess economic profits, as Albemarle is looking to acquire more upstream resources before expanding its downstream production capacity.

Ultimately, with Liontown’s board rejecting the offer, Albemarle will likely have to raise its bid to complete the deal. Liontown reported that Albemarle’s most recent bid was its third offer since October. Should Albemarle substantially raise its bid, it risks overpaying for Liontown.