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What does Galaxy Resources and Orocobre’s mega lithium deal mean for their share prices?

Orocobre’s [ORE.AX] share price has gained 49.4% so far in 2021 to 27 April, when it closed at AU$6.68. Having hit a rut in March, the lithium producer’s share price has surged during April, seeing gains of 41.7% over the past month. Orocobre’s share price closed 26 April 209.3% above its level a year previously.

Meanwhile, fellow lithium miner Galaxy Resources [GXY.AX] saw even larger gains in the 12 months to 27 April, climbing 403.7% in the past year. In 2021 alone, Galaxy Resources’ share price has soared 72.2% to the same date, with much of that growth happening in the past month. Since 5 March, when the stock hit its lowest point so far this year, Galaxy Resources’ share price has gained 74.5%.

Now Orocobre and Galaxy Resources have agreed a AU$4bn merger that will see Orocobre acquire 100% of Galaxy’s shares and create one of the world’s largest producers of lithium chemicals in the process.

AU$4 billion

Merger between Orocobre and Galaxy Resources

Since the proposed merger was announced on 19 April, Orocobre’s share price has grown 7.7%, while that of Galaxy Resources’ has climbed 6.4%.

 

Sharing the lithium galaxy

Each current Galaxy shareholder will be awarded 0.569 Orocobre shares per Galaxy share, with the new entity’s diluted capital ownership being split 54.2% to 45.8% between Orocobre and Galaxy shareholders, respectively. The proposal currently has the unanimous support of the Galaxy board and the endorsement of the board of Orocobre.

Within the new group, Martin Rowley, chairman of Galaxy Resources, is set to become non-executive chairman, with Robert Hubbard, non-executive chairman of Orocobre, to become deputy chairman and Martín Pérez de Solay, CEO and MD of Orocobre, remaining in the same posts.

The remainder of the board and management team will be drawn from both companies, and the company will be renamed to reflect its global reach “in due course”. The head office will be in Buenos Aires, with two corporate headquarters established in Australia.

At the moment, Orocobre wholly owns one lithium mining facility, Olaroz Lithium, in Argentina, as well as boron producer Borax Argentina. It also has a 34.7% stake in Advantage Lithium, to which it divested some of its lithium brine exploration projects in 2016, as well as a 25% stake in its Cauchari joint venture with the company. The Olaroz facility produced 11,922 tonnes of lithium in 2020, down from 12,605 in 2019.

With several projects in the development stage, Galaxy Resources’ sole productive site is its Mount Cattlin operation in Western Australia. In 2019, the company produced a total of 191,569 dry metric tons (dmt) of ore, falling to 108,658 dmt in 2020.

82,911 dmt

Drop in lithium production at Galaxy Resource's Moun Cattlin operation

 

The lithium battery boom

Most electric vehicles (EVs) use lithium-ion batteries as their power source, and as such, the current boom in EVs is causing a huge surge in demand for lithium. The Lithium & Battery Tech theme tracked by Opto’s Thematic Performance Screener contains three lithium-focused ETFs, all of which offer broad exposure to the rapidly expanding market.

The Global X Lithium & Battery Tech ETF [LIT] holds both Orocobre and Galaxy Resources, which rank respectively at number 26 and 30 on the list of top holdings and were weighted at 1.04% and 0.82%, as of 23 April. The Global X Lithium & Battery Tech ETF has gained 9.2% over the past month (as of 26 April) and is up 166.1% over the past 12 months.

Galaxy appears four spaces above Orocobre in the list of the Amplify Lithium & Battery Technology ETF’s [BATT] top holdings, weighted at 0.76% compared the 0.73% weighting of  Orocobre (as of 26 April). The Amplify Lithium & Battery Technology ETF rose 7.5% in the month to 26 April and is up 119.3% over the preceding 12 months.

The WisdomTree Battery Solutions UCITS ETF [CHRG.L] doesn’t hold either company’s stock, but has gained 6.8% in the past month and 107.1% over the trailing year.

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