What Gina Rinehart's 10.7% Liontown stake means for you

On Monday, Australia's richest person, Gina Rinehart, increased her stake in lithium darling Liontown Resources (ASX: LTR) from 7.72% to 10.69%.

It's an unusual move, given the Perth-based hopeful had accepted a $6.6 billion takeover offer ($3 a share) from US lithium giant Albermarle on September 4, having already rejected a $2.50 a share offer in March. 

A week later, on September 11, Liontown announced that it had entered a non-disclosure and exclusivity agreement with Albermarle - meaning, once due diligence is completed (which should be two weeks away), the US giant is only a few short(ish) steps away from taking the locally-listed lithium player private. 

The takeover will be conducted via a scheme of arrangement, which requires the approval of 75% of the company's shareholders. Either way, Hancock Prospecting's 10.7% stake isn't enough to block the decision alone. 

It comes as lithium continues to plummet, with spodumene concentrate prices falling around 70% since hitting a peak in November last year. 

So what does it mean for Liontown's investors? And what is Rinehart thinking? To find out, I spoke with long-time lithium lover Henry Jennings of Marcus Today. 

Marcus Today's Henry Jennings 

Hancock Prospecting increases stake to 10.7%

Given Rinehart has just poured hundreds of millions of dollars into the lithium hopeful, the wording of Hancock Prospecting's media release on Monday is nothing short of interesting. 

"Hancock can provide Liontown with the opportunity to manage its project execution and operational ramp-up risks where it is of value - and particularly in light of the inflationary market pressures that are creating challenges for its project delivery across Australia," the media release read," says Jennings.

"Liontown's indicated production rate of 3mtpa (increasing to 4mtpa) at its Kathleen Valley project is significant for an underground operation and carries commensurate production and operating cost risks, with its target recovery rate (modelled at 78%) also exceeding the recoveries achieved by most existing and planned lithium producers in West Australia." 

The project, according to Hancock, faces "challenges" and "risks", and its projections exceed recoveries made by most of its peers. If I didn't know any better, it sounds like Rinehart and her team are trying to sway investors into thinking Liontown's future isn't as bright as Albermarle might think. 

But would she really be buying if that was the case? 

The Room Where It Happens

Like in the Hamilton musical song, Jennings believes the last few weeks' moves confirm that Rinehart is keen to be in "The Room Where It Happens". 

"Clearly, she either wants to block the bid going through with the scheme of arrangement - which, obviously, with an 11% stake, she's got a pretty good chance of doing so, with the 75% requirement of the voters to vote in favour, if it gets that far," he says. 

The other possibility is that she wants a seat on Liontown's board, so she can have her say on the future of the Kathleen Valley project - and possibly lead a joint venture down the line, Jennings says. 

"There are some talks that she is a stalking horse for Mineral Resources (ASX: MIN), so we're waiting to see how that turns out. It seems unlikely. However, the market is not pricing in the fact that she could make an alternative arrangement bid," he says.

"The clock is ticking on Albermarle's due diligence. And, with the non-compete and exclusivity clause, it's hard for Liontown Resources to open their books and have more of a look - but it's certainly an interesting play. Nonetheless, she certainly wants to be in the room where it happens." 

What does this mean for investors? 

While Liontown has been trading around the $3 mark, its share price has slid around 2.7% since Rinehart's announcement on Monday afternoon, indicating the market feels that there is now more risk on the table. For context, the All Ords has fallen 0.67% over the same time period.

"This is the fourth bid Albermarle has made, and it's obviously the highest bid, so it's a question of whether you sell now and lock in the profits that you've made because it has been a pretty good ride for long-term shareholders or wait and see how things pan out with Gina," Jennings says. 

But that could be a long game. 

Given Hancock Prospecting has made it clear it didn't pay more than $3 a share for its stake, Rinehart could either work away with a small profit, a seat on Liontown's board or some sort of say on the future of the company. 

But trading around $3 a share, Jennings believes Liontown is fully priced - particularly in light of falling lithium prices and rising costs. 

"We would be taking a lot of profits off the table around the $2.95 to $3.00 level and then maybe keeping a small holding to see how things pan out with Gina. But certainly, it is a pretty good time to take some profits," Jennings says. 

A different lithium darling for your watchlist

If you do decide to take profits, Jennings believes Pilbara Minerals (ASX: PLS) could be a good home to redistribute your cash. 

"To me, Pilbara around $4 does look pretty good value, given the amount of cash they're generating from the business, the amount of cash they have in the bank, and their prospects going forward," he says. 

"Given the valuation that Albermarle is placing on Liontown at $6.6 billion for a project that's yet to produce anything, the price of Pilbara at around $12 billion is not exactly a big stretch. So for me, Pilbara still looks like the one to own in the sector." 

That's despite the short sellers arguing otherwise, with Pilbara overtaking Flight Centre (ASX: FLT) as the most shorted stock on the ASX - with an 11.76% short interest. 

"There has been talk in the past of players looking at Pilbara," Jennings added. 

"Rio Tinto (ASX: RIO) has been mentioned - they're obviously in the same geographical area, so they would know each other relatively well. So there's certainly some potential there for M&A."

This article was originally published for Livewire Markets on Wednesday, 27 September 2023.