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Liontown Resources (ASX: LTR) shares down 32% on Albemarle’s lucky escape

This isn’t the way everyone else is reading this but it is our opinion

Update : 20 Oct 2023, 04:01 PM

Liontown Resources (ASX: LTR) shares are down 32%. LTR shares are down on the withdrawal of Albemarle’s (NYSE: ALB) bid for the company. Plus the large rights issue that has now been launched to bring the Liontown project to production. That rights issue was successful, even if at a deep discount. But our opinion - entirely different from that of the rest of the market, we agree - is that this is a lucky escape for Albemarle. Because buying lithium assets at the top of the lithium market simply isn’t a good idea.

Liontown launched that rights issue and is now funded to production: “Signed commitment letter and credit approved term sheet with a syndicate of leading international and

domestic commercial banks and government credit agenciesfor an A$760 million2 debt funding package. Debt funding on very attractive commercial terms and includes long duration project finance facilities and an optional cost overrun / working capital facility. Equity raising of A$376 million, comprising a fully underwritten institutional placement to raise A$365 million plus a non-underwritten conditional placement to Mr Timothy Goyder for 6 million shares (equivalent to A$10.8 million)” OK, well, that’s nice. That has obviously hit the Liontown share price.

Liontown Resources share price from Google Finance

This method of financing is because Albemarle withdrew its bid: “Albemarle (ALB) also withdrew its offer to Liontown's board of directors, according to a statement on Sunday.

"Our engagement with the Liontown team has been meaningful and productive," Kent Masters, CEO of Albemarle, said in the statement. "We appreciate the level of cooperation we have received, and we thank the entire team for their efforts. That said, moving forward with the acquisition, at this time, is not in Albemarle's best interests."

Albemarle (ALB) noted "growing complexities" with the proposed transaction as a factor in its decision.”

Growing complexities is one way of describing Gina Rinhart’s 19% and change stake in Liontown: “Albemarle (NYSE:ALB) has secured an extra week to conduct due diligence on takeover target Liontown Resources (OTCPK:LINRF) after Hancock Prospecting, a company controlled by Australia's richest woman, said Wednesday it acquired a 19.9% stake in the lithium miner.”

We have noted a clever little Liontown deal before. “But we also suggested that the bid itself was a mistake by Albemarle: “The one issue that is of greater interest is the claim that Albemarle is making use of the recent weakness of the lithium price to get Liontown on the cheap. Which could indeed be true. But it's necessary to think a little here. Because it's not entirely obvious that it's just a short term weakness. Yes, the Li price is some 40% off it's tippy topmost in the last few months. But what is there to say that it's going to go back to those peaks? Our view is that people always underestimate the amount of any particular mineral that there is out there. Thus prices, when demand rises, do call forth more supply and more supply than most think can be delivered. That is, metals and minerals prices do climb, as lithium has done, but then they crash again. Not immediately, but in time they do and will. Albemarle may well come back with a higher again offer and it might be worth having a bet that it will. But long term we're bearish lithium shares and would, if we were holders here, recommend take the money and run.”

That turned out well - ALB did come back with a higher offer, the best bet was to take the cash and run. And yes, it’s still to be seen whether Albemarle has had a lucky escape here but we do think so.

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