March 19, 2018
A lot has been made over the past few days about potential takeover speculation surrounding Altura Mining (ASX: AJM OTC: ALTAF). Since Wednesday, AJM stock is up 23% and the twitterverse has been very active debating the takeover talks. The company also put out a press release addressing the speculation, confirming that they are in talks with their offtake partner Shaanxi J&R Optimum Energy Co. regarding a potential control transaction.
With all of this being the highest profile takeover speculation so far in 2018, we decided to share our thoughts on it.
Does it make sense?
Well, it’s all about perspective here right? For the purchaser, assuming it is J&R that ends up buying them, they are looking to get a secure supply of lithium, and become a more integrated player in the battery market. Furthermore, the timing may be right for an acquisition as Altura has yet to finalize offtake agreements for their stage 2 expansion, despite their willingness to allow current offtake partners to grow with them. In the mind of an acquirer, swooping in before such a scenario is finalized would make the most sense, as the acquirer is likely interested in keeping that concentrate for their own production needs.
But what about for Altura shareholders? The short term traders love takeovers, but it isn’t the best thing for longer term investors. Long term investors who are willing to stick it out as Altura begins production and scales up the operations over the next couple of years before moving on the phase II of the project can stand to gain a lot in terms of capital appreciation, assuming the lithium industry fundamentals remain in tact over that time period. With that being said, we don’t wish to downplay the execution risk that comes with such a time horizon, so we certainly won’t fault any shareholders who might be looking to cash out.
Will we see competing bids?
Often in the M&A process, especially in hot markets, competitive bids for assets arise before it’s all said and done. As such, we’ve noticed some chatter, and readers reaching out to us about different suitors, or the potential for one company making multiple acquisitions and consolidating projects. While these types of scenarios can certainly play out in the coming weeks, months, and years, we first need to take a step back and reassess.
Battery, or other downstream (Ex: LG Chem, Posco, Etc) producers, are primarily looking for long term guaranteed supply for their operations. Sure, it helps that the lithium markets are hot, and many companies represent good investments. However, at the end of the day, these types of companies are not looking to completely pivot their business models by getting into lithium production. So, if they are primarily looking to secure supply, or integrate production, going after companies that have locked up their offtake to potential competitors for years to come doesn’t make the most sense today.
Similarly, looking at major lithium producers as potential acquisition partners, would follow the same logic. They also like to take care of production of downstream lithium products in house, and wouldn’t necessarily be eager buyers of companies who have locked up their concentrate production. They would look first to high quality projects that they can takeover or partner with and turn into an integrated lithium producer to produce tailored products to suit the needs of their customers.
In the case of Altura, we would keep an eye on offtake partner Lionergy, and the Optimum Nano New Energy Alliance that both Altura and Lionergy are members of. Lionergy’s offtake agreement with Altura is for a 5 year period, which would likely not be renewed if Altura is acquired by another battery materials producer. This may force their hand to react to prevailing market conditions. Furthermore, the Alliance, which is committed to supplying a range of material and products to the EV, large EV and static storage system market, may decide to act in an effort to maintain Altura’s key upstream position in the Alliance. Aside from those players, while we wouldn’t be surprised if another company took an interest in Altura’s lithium project, we aren’t holding our breath waiting for competing bids to flow in from random companies.
As we’ve seen countless times before, and most recently in the case of Lithium X, it ain’t over til’ it’s over! What we mean by that is there are too many companies now operating in the ever expanding lithium/battery metals supply chain, and it is often tough to tell which ones are legitimate long term players. As such, there are a lot of things that can go wrong in the deal process. So whether you’re already invested in Altura, or just buying into the speculation, it is a situation that can turn on you quick, and we’d caution our readers to be careful.
Our affinity for Altura as an investment has been well documented over the past 6 months since we initially published our thoughts on them. The company has a good project, solid management team, and the valuation has often lagged peers in the past, which all made it a great investment. We would encourage readers to put heavier emphasis on those types of factors when evaluating Altura today, and looking at the takeover noise as the cherry on top. Investors who are not ready to hold Altura, or do not believe in it’s long term valuation absent an M&A deal, should think long and hard before purchasing the stock after a 20+% run up in less than a week.
Stay tuned via email or twitter– we’re analyzing a few companies that remind us a lot of Altura a few months ago (undervalued and under followed). We look forward to talking more about them in the coming weeks!