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Sichuan firm is poised for 46 per cent grip on world’s battery metal with US$4.1 billion Chile purchase

PUBLISHED : Wednesday, 23 May, 2018, 6:33am
UPDATED : Wednesday, 23 May, 2018, 9:14am

Tianqi Lithium Corp, a company based in the Sichuan provincial capital of Chengdu, is poised to become the world's largest producer of  the metal, as it looks to wrap up its US$4.1 billion takeover of Chile's Sociedad Quimica y Minera (SQM).

The producer could gain substantial influence over almost half of the world’s lithium, as demand has surged for the silvery white alkali metal, a vital component of rechargeable batteries, analysts said.

“[Tianqi] will become a true global lithium resource industry leader,” wrote GF Securities analyst Huang Liheng in a report over the weekend. 

Tianqi will control the equivalent of 46 per cent of the world’s 2017 ore output, through the combination of its 51 per cent stake in Greenbushes lithium mine in Western Australia, and its interest in SQM’s project in the Atacama Desert in Chile, according to Huang’s calculation.

The SQM investment will elevate Tianqi to become the second-largest shareholder of SQM with 25.9 per cent, just behind the dominant owner’s 29.97 per cent. Nutrien of Canada, which sold Tianqi its stake, has another 8.2 per cent to dispose of.

Tianqi’s Chile investment is a vital step in China’s strategy to secure resources and raw materials that are crucial for the nation’s technological development and economic growth. The endowment of the planet’s lithium deposits doesn’t favour China, with Australia dominating production at 43.4 per cent last year, followed by Chile at 32.8 per cent. Each country owns about 37 per cent of global lithium reserves.

China, the world’s largest vehicle market, is investing tens of billions of dollars into the development of all-electric vehicles, hybrid gasoline-electric cars and conveyances that run on other alternative fuels. 

As many as 777,000 electric and plug-in hybrid cars were sold in mainland China last year, 53 per cent more than in 2016. Beijing is targeting for new-energy vehicles to account for a fifth of all car sales by 2025, up from 3.1 per cent last year. 

SQM sold 49,700 tonnes of lithium products last year , accounting for 23 per cent of the global total, according to a report by Zhongtai Securities. Production is projected to explode by 136 per cent to 165,000 tonnes in 2021, from 70,000 tonnes this year, as additional capacity comes on stream in Chile, Argentina and Australia, Changjiang Securities said.

 “If the acquisition is completed, it would further raise Tianqi’s lithium reserves, production and sales,” it said, adding it would diversify into a producer of lithium chemicals not only from the extraction ad processing of hard ore rocks in Western Australia, but also from salt lakes in South America.

The transaction is subject to regulatory and shareholder approvals and is expected to complete by December. 

Nutrien, the Canadian producer of fertilisers, has the right to cancel the sale of its stake to Tianqi by October 3 if it has reason to doubt the Chinese company’s ability to obtain all regulatory approvals by December 13 to complete the purchase.

Nutrient is entitled to receive a “break-up” fee equivalent to 4 per cent of the deal price - or US$162.8 million - if it fails to receive the blessings of the Chilean government, or pass antitrust vetting in other nations.  

Corfo, a Chilean governmental organisation founded in 1939 to promote economic growth, has called on the nation’s antitrust authority Fiscalía Nacional Económica (FNE) to block the deal on concerns it would give SQM and Tianqi too much influence in the global lithium market. FNE has until August to decide whether to launch a full investigation on the deal. 

China's trade and economic representative to Chile Liu Rutao was quoted by Reuters to have said that he suspected other nations - also eager to secure lithium supplies - to have lobbied Chile to block the deal. 

Thanks to rising lithium product prices amid surging demand, Tianqi’s 2017 net profit surged 41.9 per cent to 2.15 billion yuan (US$337 million), while first-quarter profit this year jumped 62.7 per cent to 660 million yuan. 

SQM’s average product price was estimated to have more than doubled in the first quarter to US$16,254.  

Tianqi will fund its SQM purchase through self-raised funds, a move that was approved last week by the company’s board. The company needs to service up to US$4.3 billion in debt by 2022, according to Bloomberg’s data. 

Moody's Investors Service last Friday placed Tianqi’s “Baa 3” issuer credit rating on review for possible downgrade, as it estimated the miner’s debt to earnings before interest, taxes, depreciation and amortisation multiple could rise to 3.9 times next year assuming it is largely debt-funded, which is considered high for its rating. 

However, the debt leverage may decline if Tianqi pulls off a stock market listing in Hong Kong, which could help it raise up to US$500 million.

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