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Merger of Galaxy and Orocobre to create $4 billion giant
Shares in Orocobre (ORE) and Galaxy Resources (ASX: GXY) were up 6.0% and 6.1% respectively following a friendly $4 billion merger deal at a time when lithium has become among the most-hyped sectors in the market.
The deal will create “a new force in the global lithium sector,” according to the announcements made to the Australian and Toronto exchanges, making it the “fifth-largest global lithium chemicals company with a diversified production base and exciting growth platform, with potential to unlock significant synergies and realise value.”
Both companies have entered into a binding merger implementation deed (MID) under which they will merge through a scheme of arrangement, in which Orocobre will acquire 100% of the shares in Galaxy in return for 0.569 new ORE shares.
Off the cuff, it looks like a good deal. It comes at an opportune time, when the lithium demand outlook is bright. Lithium is the key raw material input into electric vehicle batteries powering the decarbonisation theme.
Both companies and the share markets cheered news of the deal sending both company share prices higher. In this article, we see what the brokers think:
Citi has released a Buy recommendation with a target price of $6.75 on ORE. The broker is relatively upbeat on the takeover/merger deal and highlights several upside benefits that the board-endorsed $4 billion merger will unlock. Firstly, scale: merging the two businesses will create one of the most geographically diverse lithium companies. It will have multiple projects across Western Australia, Argentina and Japan, mining lithium both from the brine and hard-rock methods.
The tie-up will reduce costs, increase capacity with a massive pipeline of growth projects that now benefit from scale advantages such as “operations and marketing potential on product mix.” The broker also says lower corporate overheads and a further re-rating on project execution are some likely benefits as the combined entity could be “5%-12% EPS-accretive in FY22 and FY23 to combined shareholders.”
UBS forecasts price increases for lithium in 2021, with electric vehicles to account for 40% of new vehicle sales by 2030. S&P Global says “production of the battery metal is set to almost triple by 2025 to more than 1.5 million metric tons,” and despite all the media attention on the “Lithium Triangle” -Argentina, Bolivia and Chile – it is Australia where supply is growing at a rapid rate.
Spodumene (hard-rock) lithium projects take three to five years to reach production, whereas brine projects take about seven years. “Australia, presently the largest producing nation, is set to maintain its position, with existing mines (many of which came online in the last three years) steadily ramping up production, bringing over 400,000 million tonnes LCE (lithium carbonate equivalent) of new supply by 2025,” says S&P Global.
Macquarie has an Outperform recommendation with a target price of $7.10. The decision to combine expertise and skills of Orocobre and Galaxy into one merged entity, will “accelerate the development of both businesses.” It will provide “synergies for the Argentinian operations as well as a stronger base from which to fund growth. The deal is supported by both boards and is subject to shareholder approval.”
Both brokers are positive on the deal and the outlook for lithium.
