Alkem (ASX: AKE) (OTCPK: OROCF) stock is up 16% on Thursday while the merger partner, Livent (NYSE: LTHM) is at this point mostly unchanged. The announced deal is that the two will merge in an all share deal to create the one company. Alkem will be slightly dominant, shareholders there gaining 56% of the combination. The logic here is that a vertically integrated lithium producer will be more valuable than two separate compasnies each dealing with their own levels of the market.
We have to admit that we're not so sure about this. Yes, we see the point, we grasp the logic, we're just not certain that it's actually entirely correct. Our reasoning is based on the idea that the lithium market - the raw lithium one that is, mine output - is likely to go into gross oversupply in the coming years. Which makes a lithium miner, like Alkem, valuable now and not so much in the future. Whereas the processor, Livent, is less valuable now but will be more so in the future. We end up thinking that - perhaps, obviously, perhaps - this is a bit like AOL taking over Time Warner. An excellent deal for those with the highly valued stock, not so good for the merger partner.
Alkem share price from ASXThe industrial logic is sensible, if not impeccable. Livent requires a consistent feed of raw lithium in order to add value to - that's what it does, produces lithium chemicals and products from the raw material. Alkem produces raw lithium from brines. So, merge the two, we gain a vertically integrated company. In a tight lithium market this makes great sense. The asset of the lithium being produced is slightly greater - that 56% - than the processing plant.
But we're really pretty sure that the lithium market is going to go into oversupply soon enough. We expect the lithium price to fall substantially. Partly just because that's how minor metals markets do work, partly because there are literally hundreds of would be lithium miners out there. At which point, some years down the line, a lithium mine becomes worth not very much, while lithium processing capacity becomes relatively much more valuable.
Our end result of this type of thinking is that this could be a very good deal for Alkem shareholders, less so for Livent. Which might well be why Alkem is up on the news of the deal, Livent not so much.
