Why Arcadium Lithium Stock Exploded by 30% and Pulled Piedmont Lithium and Standard Lithium Higher Today

Well that was quick! Just five days ago, Arcadium Lithium (NYSE: ALTM) stock began an impressive run higher on rumors that British mining giant Rio Tinto Group might be interested in buying the company. (Or maybe buying Albemarle instead -- no one was 100% sure.) On Monday, the stock soared 36% more when Rio Tinto confirmed that Arcadium was its target.

And now today, less than a week after the first rumors surfaced, the deal is done: Rio Tinto has agreed to acquire Arcadium Lithium -- and will pay $6.7 billion for the privilege.

Arcadium Lithium stock is up 30.5% as of 10:10 a.m. ET today in response. Other lithium mining stocks are following Arcadium higher, with notable outperformers including Standard Lithium (NYSEMKT: SLI) and Piedmont Lithium (NASDAQ: PLL), up 11.5% and 18%, respectively.

Rio Tinto buys Arcadium Lithium

Rio Tinto clearly wanted to make this merger happen quickly, and money was no object. The deal is expected to close in mid-2025. Rio will pay $5.85 per share to own Arcadium Lithium, or more than twice the $2.80 that Arcadium stock cost before The Australian first reported last week that a deal might be in the works -- and Rio Tinto will pay all in cash.

The valuation works out to a substantial 30 times Arcadium Lithium's trailing-12-month earnings, and an even more unnerving 7.4 times 12-month sales. For comparison, Piedmont costs only 3.7 times sales. (But then again, Piedmont isn't profitable, and Arcadium is. Standard Lithium, by the way, has no sales at all.)

On the other hand, much larger lithium stocks such as Albemarle and Chile's Sociedad Química y Minera, or SQM, sell for significantly lower multiples of just 1.6 times sales and 2.2 times sales, respectively.

Is it time to buy lithium stocks?

At $5.55 per share currently, there's only about a 6% difference between what Arcadium costs now and what Rio Tinto plans to pay for it. This being the case, buying Arcadium stock right now might not make much sense given the potential gains are so small, and the risk that the deal might not go through and the gains could evaporate, relatively bigger.

On the other hand, there are a lot of other lithium stocks to consider.

In making its bid for Arcadium Lithium, Rio Tinto came right out and said that its plan is to buy into a "counter-cyclical expansion into a high-growth market." Which means that Rio Tinto thinks the cyclical lithium market has hit bottom and is ready to bounce back.

Simply put, despite the unattractive valuation numbers, Rio Tinto thinks it's buying Arcadium at a bargain price, and that this will become apparent as sales grow and profits grow even faster.

The upshot for lithium investors

As I've stated before, this does smack of a market timing strategy that Rio's adopting. But Rio Tinto has been in the mining business for more than 150 years. If anyone at all can time this market accurately, you have to figure it's Rio. And with lithium prices down 87% from their November 2022 all-time high, even if Rio's wrong about this being the absolute bottom of the market, you have to figure we're getting close.

With Arcadium Lithium stock off the market, though, what's the best way to bet that Rio Tinto is right that the cycle has turned? I can't say for sure, but you can start with SQM stock. Valued at 2.2 times sales, it's one of the cheaper large lithium miners, and arguably the cheapest profitable miner. Although earnings are depressed right now, analysts have SQM stock pegged for a valuation of just 7.5 times what it's expected to earn next year.

If lithium prices truly have hit rock bottom, SQM stock could be a great way to profit when they bounce.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.