Could shrewd acquisition of Latin be a winning | Australian Markets

Prime-gun exhausting rock lithium producer Pilbara Minerals – now PLS – has finalised a $560 million all-scrip acquisition of Latin Sources and its extremely regarded Salinas hard-rock lithium project in Brazil.

After navigating months of regulatory approvals, together with a inexperienced mild from the WA Supreme Court docket, the acquisition earlier this 12 months formally built-in Latin’s flagship project within the Brazilian mining state of Minas Gerais into PLS’ growing portfolio.

Salinas has a measured and indicated useful resource of 78 million tonnes at 1.24 per cent lithium oxide, positioning it as a high-grade world development asset in an enticing jurisdiction surrounded by all-important entry to low-cost power choices.

PLS’s endeavor valued Latin at a 57 per cent premium to its market share price, offering Latin’s shareholders an enticing development option at lithium market lows and aligned it with PLS and its counter-cyclical growth strategy.

This deal delivers our second wholly owned, Tier-1 lithium asset and offers us with the flexibleness to sequence new provide according to rising market demand.

Salinas alone would have struggled within the present depressed lithium market to amass the help and capitalisation or funding companions essential for its sizable lithium development. It is going to now obtain the consideration it deserves from a cashed-up lithium main trying to diversify its provide chain and strengthen its world foothold.

In flip, PLS believes Salinas gives its shareholders the advantages of geographical and income diversification to enrich its giant Pilgangoora lithium operation in Western Australia’s Pilbara area.

It may also transform a great instance of when a courageous few purchase property by making counter-cyclical acquisitions during commodity price lows, it may possibly repay as a shrewder company strategy than the choice of a cashed-up, procyclical splurge.

On one stage the strategy might sound counter-intuitive.

When markets are depressed or commodities are weak, anguished corporations hardly ever splurge on mergers or acquisitions. It may also be tough for company boards and management to clarify the inevitable discomfort that comes with spending shareholders’ money or scrip as high share costs and income dry up.

Nevertheless, takeovers of nickel, cobalt and lithium producers across the globe level to the risks that may come when shopping for in a market peak. You don’t should look far to search out initiatives that unlocked huge income at first of the 2020s solely to fall to pre-COVID costs undermined by over-supply and weakened projections that brought about mine closures and insolvencies throughout the mining industry.

Australian nickel-cobalt producer Jervois International, for instance, was valued at more than $1 billion in 2021 when the electric vehicle revolution was at its highest.

Jervois International shares have been trading for almost $1 every when the company bought Finnish cobalt refiner Freeport Cobalt for more than $250m. Little more than 3.5 years later, the identical shares are hovering at about 0.01 cents every as Jervois International prepares for Chapter 11 chapter with more than $260m in debt.

MinRes, Australia’s largest crushing contractor and a main lithium and iron ore producer, additionally noticed its share price more than halve up to now 12 months. At lithium’s price peak in 2023, it bought the Bald Hill lithium mine for $260m, however needed to totally stop operations on the project final 12 months as costs dropped out of the market.

On the opposite facet of the cyclical coin, lots of gold aficionados will bear in mind the fast rise of Australia’s greatest gold miner Northern Star Sources. In 2014, the gold price was plummeting, leaving the world’s #1 gold miner, Barrick Gold, scrambling and trying to swiftly offload a trove of world gold mines.

Barrick had spent a long time discovering and developing operations that have been panic bought to protect money on the backside of the market, and a small group of Aussie discount hunters emerged to accumulate three world-class mines with three million ounces of gold for much less than $100m.

The then unknown mining engineer, Invoice Beament, co-ordinated the deal, in a once-in-a-lifetime counter-cyclical wager that catapulted a small-capped stock to the highest of the gold mining heap in simply 10 years.

Essentially the most poignant examples of procyclical vs counter-cyclical takeovers is the fabled story of Xstrata Sources. The mining giant’s rollercoaster journey and its acquisition of Jubilee Mines during the 2007 nickel growth is an Australian mining legend.

The procyclical deal was primarily based on Xstrata’s counter-cyclical transfer made earlier within the decade.

Xstrata listed on the London stock exchange in 2002 following the acquisition of Glencore’s Australian thermal coal property for a helpful US$2.5 billion (A$4.2 billion) earlier that 12 months. A 12 months later, Xstrata had misplaced ground on the stock exchange and, in a stroke of genius, determined to diversify into base metals in Australia by buying Mount Isa Mines.

The deal was a blockbuster, valued at some US$2.9b (A$4.9b), and doubled Xstrata’s market valuation to US$6b (A$10.2b) when the copper price was nonetheless labouring under $1 per pound.

The counter-cyclical transfer made Xstrata a pressure in world copper and zinc manufacturing and the company watched its share price almost quadruple in much less than three years, helped by a new copper price sitting fairly at $3.50 per pound.

Xstrata went on to buy the Falconbridge copper/nickel operations in 2006, and by 2007 was value almost US$50b (A$56b).

Nickel began booming, so management splashed out to scoop up WA-based Jubilee Mines and its Cosmos nickel mine for a juicy US$2.9b (A$3.1b).

When nickel costs subsequently nosedived during the 2008 world financial disaster, so did Xstrata’s share price and the company by no means absolutely recovered its former glory.

By the time Xstrata was enveloped by its successor Glencore in 2013, the Cosmos mine was absolutely closed and Xstrata was value much less than $33b. Glencore bought the mine asset in 2015 for simply US$19m (A$24.5m), a appreciable write-down for a prime of the market spending spree.

Hindsight is 20:20, nonetheless, and in phrases of commodities cycles it’s secure to say that historical past has a manner of repeating itself – which brings us back to the PLS/Latin Sources deal.

PLS surged to prominence off the back of its Pilgangoora lithium and tantalum mine in WA. The company has all the time had worldwide ambitions and operates with a counter-cyclical growth strategy.

Its deal with Latin indicators PLS’ entrance into the rising South American lithium market, at a time when lithium globally is unloved and out-of-favour.

It has resulted in Latin’s delisting from the ASX, with new PLS shares already trading on the market.

The Salinas project might be rebranded by its new proprietor as Colina and is anticipated to considerably bolster PLS’ useful resource base, probably contributing up to 30pc of the company’s pro-forma steady-state lithium manufacturing.

One of the project’s most important points of interest – exterior its appreciable sources and high-grade lithium – is its strong infrastructure and the advantages of mining in Brazil, together with hydroelectric energy and the streamlined allowing processes within the Minas Gerais mining area.

Latin’s preliminary financial evaluation outlined annual spodumene focus manufacturing of almost 500,000 tonnes, with manufacturing operating prices on par to PLSs Pilgangoora operation in WA, which remarkably stays profitable even at at present’s depressed spodumene focus price.

The evaluation additionally delivered an spectacular after-tax web current worth of $3.6b, with an inside price of return of 132pc – or a seven-month payback – following a section one capital expenditure of $489m. The research assumed a spodumene focus of US$927 (A$1464) a tonne with a US$536/t (A$846/t) complete manufacturing price. That’s not that far off at present’s traded price of about US$880/t (A$1390/t).

Minas Gerais’s development is anticipated to advance quickly, with investment selections prone to be tied to the lithium market’s restoration and evolving buyer wants.

Solely time will inform if the deal ends in the eventual opening of the Brazilian mining operation and if it proves a profitable endeavour.

Daring strikes amid subdued commodity markets have traditionally confirmed to be very shrewd. Given the doom and gloom round EV demand and lithium costs, any management prepared to take a leap on a counter-cyclical deal deserves to obtain a tip of the hat. Hopefully PLS’s latest transfer proves profitable for it and the outdated Latin shareholders.

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