Have Australian fund managers got their lithium call wrong?

By Jonathan Shapiro – Financial Review

Have Australian fund managers got their lithium call wrong?

Rio Tinto’s $10 billion Arcadium Lithium takeover has the bulls excited again. But hedge funds believe the move signals a major shake-up and more pain ahead.

Rio Tinto’s $10 billion deal to buy Arcadium Lithium earlier this month was a jolt of confidence in a commodity that sorely needed it. Stocks had been sliding – along with the spot price – as the investor hype about lithium’s future began to fade.

The arrival of a $165 billion resources giant changed that. And fervour around which other producers would be targeted by big cashed-up players has since ignited a rally. UBS sales trader Sujit Dey has been telling clients to avoid shorting lithium on renewed China stimulus and the prospect of more deals – and has identified Hancock Prospecting, Norwegian energy firm Equinor and ExxonMobil as potential acquirers with deep pockets.

But the reality is that Rio Tinto’s move may not really be the validation that lithium bulls have been hoping for. In fact, hedge funds that have profited by shorting stocks in the sector are ready to do so again.

Rio Tinto’s acquisition, they believe, is a specific and strategic investment that complements existing exposures. Effectively, Rio Tinto is taking the view that the brine producers will mine lithium at a lower cost, due in part to new technology and relegate the hard rock producers to marginal swing producer status.

The miner also stated it is accelerating production that otherwise would have been constrained by balance sheet issues, adding to the oversupply. That may not bode well for the prospects of companies most favoured by Australian fund managers, such as Pilbara Minerals, Liontown Resources and Mineral Resources. It may also prompt some soul-searching among Australia’s largest superannuation funds and active managers.