Rio Tinto eyeing £4bn stake in Chilean lithium producer - reports

Rio Tinto is said to be mulling the acquisition of a $5bn (£3.8bn) stake in a Chilean lithium producer as demand for the metal surges due to its use in electric car batteries.

Rio is close to buying a 32% stake in Sociedad Quimica y Minera de Chile (SQM), one of the world’s largest producers of lithium, from Canada's Potash Corp, the Australian Financial Review reported, citing Chilean publication El Mostrador.

China's Sinochem also has been reported as being interested in buying a stake in SQM in recent weeks.

Ahead of Potash's proposed merger with Agrium it is looking to offload this stake and other investments, as part of stipulations from Indian regulators.

SQM, which has a market value at just over US$15bn, produced roughly 44m tonnes of lithium carbonate last year and is developing projects in Chile and Australia.

Rio's main exposure to lithium is through its 100%-owned lithium and borates mineral project in Jadar, Serbia, which is still in the early stages of development.

A purchase of such a stake would not be inconsistent with Rio's current strategy, said Investec, adding would provide a foothold in a sector where the company has some exposure but with Jadar still many years away, "if it is developed at all".

"There is also some good correlation with RIO’s existing industrial chemicals businesses (borates, salt) and it would certainly further enhance RIO’s position in the growing EV/battery market."

But analyst Hunter Hillcoat said the move could provide concerns from shareholders just getting used to receiving healthy returns, with the $5bn for a 32% stake, assuming no strategic premium, "is a big chunk to swallow in a yet-to-be-proved sector".

"Investors have been settling into a period of solid cash generation and shareholder returns, following the 2015-17 focus on balance sheet repair, and may be dismayed to see RIO now making acquisitions, particularly given the company’s poor history in this regard," he said, referencing Alcoa and Riversdale.

On balance, Hillcoat noted that Rio now has "the best balance sheet amongst its peers, the stake is liquid, it provides an opportunity to buy into a Tier 1 asset, will cost not a great deal more than the US$4bn in buybacks RIO has announced just this year, and provides an element of growth that the market criticises Rio for lacking."