Ground Breakers: Azure attracts $1.63bn SQM splurge, nabbing holders a 1430% gain

Andover lithium JV owner Azure Minerals emerges as the proud owner of a $1.63 billion bid from major shareholder SQM
Takeover, seemingly modelled to avoid a Rinehart-Liontown sitch, would net investors a 1430% gain on their investment YTD
Pilbara Minerals sitting on M&A sidelines as it focuses on organic growth

Azure Minerals (ASX:AZS) shareholders will net a 1430% gain in just 12 months if they take up a massive offer for the lithium explorer from major shareholder SQM, one of the world’s largest lithium producers.

Tony Rovira’s lithium and nickel explorer has finally emerged from its slumber to reveal one of the industry’s worst kept secrets, with the Chilean miner offering $3.52 cash per share to take the 60% owner of the Andover lithium discovery in WA’s north off the market.

The project, 40% owned by legendary prospector Mark Creasy, has demonstrated its potential to become a tier-1 lithium discovery, with an exploration target of 100-240Mt at 1-1.5% Li2O, something that would place the deposit near in league with early JORC resources at mega-deposits like the nearby Pilgangoora and Wodgina mines.

And SQM has given itself some protection against an interloper like Gina Rinehart, whose Hancock Prospecting killed a $6.6 billion bid from US competitor Albemarle for WA’s next major lithium producer Liontown Resources (ASX:LTR) by acquiring a blocking stake on market.

Should the scheme fail, SQM will make a $3.50 per share off-market takeover offer, ensuring a raider would need to outbid SQM to get a slice of the pie.

The failure of the Liontown takeover appears as a sort of Aesop’s Fable for lithium juniors about the dangers of being blindsided.

A handful of investors who sold to squillionaire Gina Rinehart at or just below the $3 bid price won the day, but those who were holding on for the scheme meeting were left in the cold, with Liontown having to return to equity markets to raise cash to finish the construction of the $951 million Kathleen Valley mine by mid-2024 at $1.80.

SQM has almost 20% of Azure already, and has the support of its third largest shareholder, Wilhelm Zours’ Delphi Group (~11%). Where its second biggest shareholder Creasy (~13%) sits remains a matter of intrigue.

The bid would seemingly price his share of Andover at ~$1.08b, with SQM’s Mt Holland JV partner Wesfarmers (ASX:WES) commonly floated as a potential acquirer of his stake, though Creasy has historically liked to keep skin in the game when he sells into an offer.

Azure wins big premium

The Azure board has been rewarded for its obstinance, with even falling lithium prices not dulling the enthusiasm of buyers in early stage companies with big dreams.

SQM is taking the punt on Azure on the basis of its early drilling success. A 100,000m resource drillout is underway but the official number won’t be known until the March quarter next year.

It previously tried to acquire the junior at $2.31 in August, an offer rejected by Rovira and Co. in favour of a $2.40 per share $130 million placement and share purchase plan.

The accepted bid comes in at a 52.4% premium to SQM’s previous proposal and 44.3% premium to its last closing price of $2.44. Azure was worth just 23c at the turn of the year, before SQM came on board as a cornerstone investor via a $20 million placement and a strike in June of 105m at 1.26% Li20 that really kicked off its run.

With the world gripped in economic uncertainty, MD Tony Rovira indicated a sale now would help the company avoid finance and development risks associated with large scale projects like Andover.

“Whilst we firmly believe that Andover has the potential to be a major lithium project, there is significant time, cost and risk associated with developing a project of this scale, particularly in the context of an uncertain broader economic outlook,” he said.

“As such, the Board believes that the Transaction provides Azure shareholders with a compelling opportunity to de-risk their investment and realise certain value at an attractive premium to historical trading levels.

“The Transaction also presents a great outcome for other stakeholders in Andover, who will benefit from the project being developed by an experienced, well-capitalised and highly regarded company in SQM.

“The Board is very proud of the significant achievements of the Azure team to date, including the discovery of the world-class lithium deposit at Andover, and believes that the Transaction represents a fantastic culmination of all the hard work over many years.”

Azure Minerals (ASX:AZS) share price today

Staying on the sidelines

One major that appears to be staying on the sidelines when it comes to all this M&A activity is Pilbara Minerals (ASX:PLS), which has shuffled M&A backwards in its priorities as lithium prices have come back to reality.

For the first time in yonks Pilbara’s cash balance fell in the September quarter, dropping from $3.3b to $3b after a $421 million dividend payment and investments in projects to expand its Pilgangoora mine despite generating a cash margin of $360m.

It is the latest spodumene producer to reveal a big drop in concentrate sale prices, with prices for its 5.3% Li2O material falling 47% YoY and 31% QoQ to US$2240/t, equivalent to US$2553/dmt on a 6% benchmark. 12 months ago PLS was drawing US$4266/t.

Operating costs also lifted 18% YoY and 19% QoQ to US$747/t, though lower royalty payments meant CIF costs were only 3% higher QoQ and 11% lower YoY at US$1004/t.

PLS pulled in $493m in revenue on 146,400t of concentrate sale, with lower output expected early in the year due to shut down maintenance and tie in work ahead of commissioning for an expansion to 680,000tpa, due to be completed in around 12 months.

First ore from a further expansion to 1Mtpa is due in the third quarter of FY25, while a pre-feasibility study to go even further beyond that is due in the June quarter of 2024. With a decision on a one-off adjustment in the dividend policy also thrown to one side with lithium prices dropping from a boil to a simmer, the $11.5 billion miner has placed its focus back on internal growth.

Adding to that, commissioning by South Korea’s POSCO of the first of two 21,500t lithium hydroxide trains in Gwangyang is due to take place in the December quarter. PLS has an 18% share and an option to increase that to 30% early in its operating life, and an update on a partner for a further downstream processing initiative to incorporate 300,000tpa of spod from the expansed Pilgangoora is due in the March quarter.

Pilbara looked like it was gearing up for a big M&A push earlier this year when it picked up Macquarie banker John Stanning as its new chief development officer, but MD Dale Henderson now describes M&A as a distant fourth in its list of priorities.

“Within the lithium world there are many more explorer options tham there are developers or operators so that really narrows the field,” he said on a call with analysts.

“At Pilbara we’ve got a wide-angled lens as we think about where we might go, and the reason for describing it as a distant fourth is just to reassure all of our investors and stakeholders that we’ve got our eye trained on not taking our eye off the ball.

“We’ve got a hell of an organic growth path there which is the envy of many, the best thing we can do to create value most rapidly for our shareholders is do a great job of bringing that forward and getting up the curve, enjoying the benefits of lower cost, higher volume.

“If the pricing remains good, which it seems it could well be, we can continue to enjoy those strong operational margins onwards and upwards.”

Henderson says the long term outlook for lithium and EV penetration remains positive despite the impact of momentum and sentiment on lithium pricing, and hinted that government policies impacting South American competitors would be beneficial for Australian producers, believing they will result in reduced, delayed and lower economic returns on projects.