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Wesfarmers offered a 47 percent premium for
Kidman, which is developing the Mount Holland project in Western
Australia through a joint venture with battery chemicals maker
Sociedad Quimica y Minera de Chile S.A. (SQM).
But even that offer, which valued the company at A$776 million
($543 million) or A$1.90 per share, undervalued the company,
said analysts at J.P. Morgan and Canaccord Genuity.
Prospects for lithium demand look strong over the next decade as
governments worldwide set ambitious targets to increase electric
vehicle sales.
In May 2018, Kidman signed a lithium supply agreement with
electric carmaker Tesla, which this week forecasts a shortage of
key electric vehicle minerals occurring in the future.
JP Morgan said that Wesfarmers' share price bid "fundamentally
undervalues" Kidman's share of the joint venture, adding that
Mount Holland is a "Tier-1" project.
Canaccord said the bid "falls short" of their valuation of
A$2.15 per share for Kidman.
Both companies say there is the potential for a third party to
place a higher bid for Kidman.
"The chance of an interloper seeing greater value in Kidman,
either joint venture partner SQM or an outside party, is real,"
said JPMorgan.
Kidman shares closed on Friday just below the offer price at
$A1.87.
Part of the reason for the lower valuation stems from problems
the lithium mining sector has faced in gaining financing for
their projects.
The Mount Holland site reportedly will require about A$600
million in capital. SQM has pledged $100 million to the project.
Miners have struggled with financing as retail equity markets do
not provide the scale of funding they need and banks have been
reluctant since it is not easy to hedge their lithium price
risk.
"It's next to impossible to hedge so therefore project financing
becomes really difficult," said Aaron Ross, global head of
resources at ANZ at an industry event in Melbourne.
Large auto and battery makers could seek equity stakes in
companies instead of signing supply off-take agreements, as
Chinese companies have done, said Ross.
Diversified miners that have started to accumulate cash could
also step in, with Rio Tinto, South 32 and Fortescue all looking
to get into lithium, said Reg Spencer, mining analyst at
Canaccord, with Rio Tinto best placed because it already has
lithium exposure.
"It's perfect timing really from Wesfarmers. It's hard, the
banks and not many other people are prepared to fund those
things at the moment," said Andy Forster, senior investment
officer at Argo Investments, adding that Mount Holland is one of
the better lithium projects around.
"I'd be surprised if anyone else came over the top, but never
say never."
(Reporting by Melanie Burton; editing by Christian Schmollinger)
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