Tianqi Lithium's Overseas Acquisitions Face Ongoing Troubles: What Are the Lessons? (AI Translation)

【周刊提前读】天齐锂业海外并购麻烦不断 教训何在？

Tianqi Lithium (002466.SZ/09696.HK), a leading company in lithium resources, faces multiple challenges in 2024. On June 18, the Chilean Financial Market Commission rejected Tianqi’s proposal to hold a shareholders' meeting aimed at opposing the nationalization of Sociedad Química y Minera de Chile (SQM), where Tianqi holds a 23.77% stake. This rejection highlights Tianqi's inability to prevent the Chilean government's nationalization plans, carried out through the state-owned National Copper Corporation, Codelco, set to enforce and commence a joint venture with SQM in 2025 [para. 1][para. 2][para. 3][para. 4].

Tianqi's performance has plummeted in the first quarter of 2024, marking a loss of nearly 4 billion yuan, reversing from the most profitable lithium company in China in 2023 to the "king of losses" on the A-shares market. The company’s stock price fell significantly, and analysts have heavily revised expectations for Tianqi's earnings in 2024 by substantial margins [para. 5][para. 6]. Tianqi's financial troubles are primarily attributed to its high-priced lithium concentrate inventory despite holding “world's lowest-cost” resources. These difficulties are rooted in a series of high-leverage acquisitions, particularly its 2018 $4 billion purchase of a stake in SQM [para. 7][para. 8][para. 9].

Tianqi's acquisition of SQM has brought about financial instability, leading to the dilution of its influence over important assets like the Greenbushes lithium spodumene mine, which it initially controlled. The deal with Australian mining company IGO diminished Tianqi’s shareholding to 26.01%, drastically reducing its dividend share while still retaining significant supply obligations [para. 10][para. 11][para. 12]. This discrepancy has become particularly problematic as lithium prices have declined, exacerbating the financial strain on Tianqi's domestic operations [para. 12][para. 13][para. 14].

Tianqi's misfortunes are compounded by an inventory of high-priced lithium and strategic missteps. While SQM and Codelco's joint venture will extend operations in the Atacama Salt Flats until 2060, Tianqi remains sidelined in the decision-making process, partly because of the conditions it accepted during the acquisition, significantly limiting its operational control and access to strategic information [para. 15][para. 16][para. 17][para. 18].

The Chilean government has laid out detailed plans for the joint venture, starting from 2025, Codelco will control 51% of the venture, ensuring a substantial share of profits for the government. The production target includes a substantial increase in lithium carbonate equivalent (LCE) production over time [para. 21][para. 22][para. 23]. The mixed market views on this nationalization underscore the critical role of the Atacama Salt Flat in global lithium production, making up a significant portion of SQM's revenue [para. 24][para. 25].

The legal and operational landscape of the joint venture is complicated: Tianqi has no decision-making power and lacks access to operational insights, further diminishing its ability to profit from its substantial investment in SQM [para. 26][para. 27][para. 28]. Tianqi’s competitive position is weakened, casting doubts over its handling of high-leverage overseas acquisitions [para. 28][para. 29].

The Greenbushes project, another key asset for Tianqi faces uncertainties. Its internal lithium concentrate pricing, influenced by different shareholder strategies, has at times been excessively high compared to market rates. This has posed challenges for Tianqi's downstream operations, affecting profitability amidst falling lithium prices [para. 30][para. 31][para. 32][para. 33].

The industry's outlook remains precarious as forecasted oversupply could keep prices depressed, posing valuation risks for Tianqi's inventory. The company’s Kwinana plant in Australia has faced delays and operational issues, producing significantly below capacity, adding to the financial losses and operational inefficiencies [para. 34][para. 35][para. 36][para. 37].

Looking back, Tianqi’s acquisition strategy, although bold and ambitious, appears increasingly fraught with risks and managerial shortcomings. High leverage and poor timing have left the company consistently grappling with cash flow issues, as illustrated by the high stakes acquisition of SQM and subsequent financial struggles including significant repayments and debt restructuring agreements [para. 38][para. 39][para. 40][para. 41][para. 42][para. 43][para. 44][para. 45]. Despite securing substantial upstream assets, Tianqi has faced persistent financial instability, making robust risk management and strategic foresight essential [para. 47][para. 48][para. 49].