From Agreements to Merger Controversy
Shares in Allkem (ASX:AKE) continue to trend higher and not just the strong rebound in lithium carbonate prices at the Guangzhou Futures Exchange especially with comments at the 2023 United Nations Climate Change Conference (COP28) hint at a major change. But today, our focus is largely on the ‘micro’ side with key updates coming from Allkem (ASX:AKE).
Before diving in on the updates, we turn our attention to the technicals and the decline in Allkem this year has been rapid, but downside momentum is dissipating. The stock is drawing closer to the 2021 breakout level at around $7.50. While the dust needs to settle following the tumultuous decline, Allkem should find support and recover next year.
Updates
First off, Allkem (ASX:AKE) has a couple of material updates covering a key development in North America and some financing. One crucial development is (i) the signing of the Kapisikama Agreement, an ‘Impact and Benefit Agreement’ with the Grand Council of the Crees (Eeyou Istchee), the Cree Nation Government, and the Cree Nation of Eastmain. This agreement is related to the James Bay Lithium Project and is designed to govern the relationship between Allkem and the Cree Nation. It emphasizes a sustainable development approach based on mutual trust and respect throughout all project phases. While the sustainable development approach outlined in the Kapisikama agreement emphasizes mutual trust and respect throughout all project phases, approval of the Environmental and Social Impact Assessment (ESIA) from the Quebec government and Cree nation (Comex) is still pending.
Another positive development for Allkem is (ii) the increase in its international financing corporation (IFC) project financing by an additional US$50 million with IDB Invest – and comes after the initial US$130 million signed back in July 2023. This additional funding is allocated to Allkem’s Sal de Vida Project in Argentina. Another positive part is that the terms of the new funds align closely with the previously established IFC terms.
Finally, we turn our attention to some potential Boardroom drama. The upcoming vote by Allkem shareholders on the proposed ~US$11 billion lithium merger with Livent on 19 December 2023 is generating significant attention and not just from supportive shareholders.
A quick recap on this, the merger, touted as a ‘merger of equals,’ aims to create one of the world’s third-largest lithium player by volume (once all growth options are realized within the next 10 years). Successful approval would result in Allkem’s ASX and TSX shares being delisted by 5 January, with the new company’s shares trading on the NYSE, while its CDIs continue trading on the ASX.
So far, major shareholder Toyota has expressed support towards the deal, but Ausbil (with a 3.3% stake) plans to vote against it, claiming the proposed merger ratio undervalues Allkem’s contribution to the new entity, named Arcadium Lithium. There are also some reports in the ‘Street’ that argue that the current deal favours Livent, as Allkem shareholders must choose between retaining 100% exposure to existing Allkem assets or 56.1% of the combined business.
One big issue, in our view, is a listing in the NYSE might lead to reduced liquidity for the ASX listing and may ultimately lead to a full takeover of Allkem – not a palatable outcome for those wishing to invest mainly in domestic equities. In addition to this concern, we also note that the management of Livent will assume dominant roles within ‘Arcadium’, posing questions about its ‘investability’ compared to Allkem by itself. There are even some analysts that view that Allkem provides the lion’s share of resources, production capacity, and, by extension, profits. At this point, we find that suspect but (suspending disbelief) it could be a fair point.
Regardless of the naysayers, we support the merger as the commercial logic of joining Allkem’s and Livent’s portfolios could lead to massive synergies and even improve efficiencies.
At this point, it may be too early to tell. Best to wait out the shareholder vote.
In the meantime, we maintain our HOLD recommendation on Allkem (ASX:AKE).
Disclosure: Interests associated with Fat Prophets hold shares in Allkem (ASX:AKE).
