Lithium stocks surge as Liontown rejects a $5.5bn Albemarle takeover bid

Liontown (ASX: LTR) management is going all-in on their belief in the company, rejecting a $2.50 per share takeover bid from global heavyweight Albemarle. The $5.5 billion offer represents a 64% premium to the stock’s last close of $1.53 on Monday.

This comes at a time where lithium valuations are struggling amid a sharp pullback in spot prices. Lithium carbonate prices in China have tumbled below 270,000 yuan a tonne, the lowest in 15 months and down more than 50% since November 2022 highs.

Tuesday’s price action

Liontown shares rallied 31% as the market opened to $2.00 and quickly rallied towards the offer price, reaching session highs of $2.42 in early trade.

The takeover bid inspired a broad-based rally for lithium stocks and by 11:00 am AEDT:

• Core Lithium (ASX: CXO) +19.2%

• Argosy (ASX: AGY) +15.5%

• Pilbara Minerals (ASX: PLS) +14.8%

• Sayona Mining (ASX: SYA) +13.5%

• Global Lithium (ASX: GL1) +13.0%

• Allkem (ASX: AKE) +12.1%

• Lake Resources (ASX: LKE) +12.0%

• Winsome Resources (ASX: WR1) +11.0%

• Leo Lithium (ASX: LLL) +10.2%

Most of these lithium stocks have been selling off since February and Tuesday’s sharp re-rate has helped many of these names return to positive year-to-date territory.

A potential short squeeze

It’s worth noting that short interest among lithium stocks has been aggressively rising since November last year.

Several lithium names have topped the short interest leaderboards. As of Tuesday 28 March, this included (short rank and short % interest):

• (2) Core Lithium 10.04%

• (4) Liontown Resources 8.91%

• (6) Sayona Mining 8.61%

• (13) Vulcan Energy 6.67%

• (18) Lake Resources 6.34%

Selloff opens the door for M&A

The lithium selloff has put the industry in a rather awkward place as it tries to balance the current weakness in Chinese EV sales and spot prices against long-term EV demand forecasts and the strategic nature of the battery metal.

Before Tuesday’s re-rate, most ASX-listed lithium stocks were down 20-30% year-to-date which has now prompted one of the world’s largest lithium companies – Albemarle – to try and stock up on a high-quality project at discounted price.

To add some perspective, Liontown expects its Kathleen Valley Lithium Project to hit production status in the second quarter of 2024. The project boasts a ‘globally significant’ Mineral Resource Estimate of 156 million tonnes at grades of 1.4%.

A November 2021 Definitive Feasibility Study said the project is expected to supply approximately 5% of global spodumene, ramping up to around 6% by 2029. The project was stated to have a post-tax NPV of $4.2 billion, based on a mine life of 23 years and referenced a long-term weighted spodumene price of US$1,382 a tonne.

Interesting, Pilbara Minerals received an average realised price of US$4,993 a tonne for its spodumene in the first half of FY23. Even if prices were to halve from those levels – it's still well-above the DFS’ reference price.

Not the first time

This isn’t the first time Albemarle has had a crack at buying Liontown.

The company received non-binding indicative proposals from Albemarle at $2.35 on 3 March 2023 and $2.20 per share on 20 October 2022.

There are three interesting takeaways from this:

1. The 3 March takeover offer was not announced to the market. But Liontown shares rallied 13% to $1.63 on that day

2. The new $2.50 takeover represents a 13.6% increase compared to the October bid

3. Between 20 October 2022 and 27 March 2023 (the day before the new offer) – Liontown shares have tanked around 17% 

Why Liontown rejected the offer

The Liontown Board noted the “opportunistic timing of Albemarle’s Indicative Proposal, coinciding with recent softness in companies exposed to the lithium sector and the pre-production status of the Kathleen Valley Project.”

In other words: Why are you trying to lowball us?

The announcement also pointed out five key points including:

• A significant amount of de-risking has occurred for Kathleen Valley in recent months

• There are extensive growth options for the project including Director Shipping Ore

• There are few projects that have the scale, quality and mine life as Kathleen Valley

• The near-and-long term looks positive for lithium

• Albemarle has several other benefits from acquiring Kathleen Valley, including significant synergies from its existing operations in Australia

Value aside, Kathleen Valley faces a substantial funding shortfall after a January update flagged that capital costs to first production jumped to $895 million from $473 million.

Management said the company “continues to progress a number of attractive funding options for the remaining capital at the Kathleen Valley Lithium Project and expects to update the market on this front in the near term.”

With that said, perhaps Tuesday’s 50% re-rate represents a perfect time to initiate a …