(Bloomberg) – After borrowing billions to fund overseas expansion to trigger a lithium boom, a fall in prices has driven one of the world’s leading producers into a mountain of debt.
The Tianqi Lithium Corp. Over $ 6 billion in value demonstrates the risk of boom-and-bust cycles in commodity markets that can punish failed or overblown companies, even in sectors where a dominant position is achieved.
While the long-term prospects for lithium are positive given the increasing demand for batteries for electric vehicles, the sector is fluctuating from a continuing drop in prices triggered by an explosion in supply and a reduction in EV subsidies in China, the largest car market.
Tianqi has taken out a $ 3.5 billion loan from China CITIC Bank, which bought a 24 percent stake in a Chilean competitor in May 2018. According to Moody’s Investors Service, $ 2.3 billion is expected to be due in November.
The company’s 300 million dollar offshore bonds fell the most last week. The giant miner was reportedly faced with uncertainty over the repayment of debts of only 300 million yuan ($ 43 million). Since then, they have dropped about 66 cents against the dollar, almost an all-time low, and are still concerned about the dollar’s financial health.
It is not just Tianqi who feels the pain. The world’s leading producer Albemarle Corp. has discontinued its plans to spend $ 1.5 billion on new capacity, and Livent Corp. also reviews its growth ambitions. In Australia, the juniors Galaxy Resources Ltd. and Pilbara Minerals Ltd. cut their production plans by blaming low prices and oversupply. And in Canada, the up-and-coming manufacturer Nemaska Lithium entered into creditor protection last month after a strategic review.
All of this is in response to an early wave of new supply that has flooded the market in the past two years and even overwhelmed growing demand for the material used in rechargeable batteries. According to the consultant Benchmark Mineral Intelligence, prices have halved since their peak in May 2018.
Tianqi’s business is “burdened by very high refinancing needs,” said Clare Guo, credit desk analyst at Nomura International HK Ltd.
The company announced in a report filed on January 23 with the Shenzhen Stock Exchange that it had funded a payment for the 300 million yuan onshore bond that was callable on February 1, the Lunar New Year holiday in China was extended due to the coronavirus outbreak.
At the beginning of 2018, as prices soared to a multi-year high given the rapid interest in lithium assets, Tianqi closed his deal, 24% in Sociedad Quimica y Minera de Chile – known as SQM – for more than $ 4 billion Buying dollars. The fall in prices since the acquisition has burdened Tianqi with a lot of debt and a steadily falling profit.
In April 2019, the company announced that the focus of the year was on reducing the ratio of assets to liabilities to a “more reasonable level” and highlighted that gross margins and cash flows were healthy. While gross profit margins were 53% in the third quarter of last year, after more than five years, the company saw a net loss in the first quarter as debt repayments increased. The net interest service rose to 552 million yuan.
The company raised around 2.93 billion yuan in a rights issue in December, less than half of the 7 billion yuan it sought to cover the cost of the purchase of SQM.
Approximately 41% of these new shares were bought by Tianqi Group, the major shareholder, and controlled by founder Jiang Weiping, along with related parties, including Jiang’s wife Zhang Jing and son-in-law.
In Moody’s last month, Tianqi’s rating was lowered from Ba3 to B1. Lower than expected proceeds from the rights issue would result in slower debt relief and lower liquidity. Moody’s estimates that total debt will be approximately 7.5 times operating profit over the next 12 months.
“The outlook for the negative ratings continues to reflect the uncertainty surrounding Tianqi Lithium’s refinancing plans, weak liquidity position and weak operating business,” wrote Gerwin Ho, Moody’s leading analyst for Tianqi, in a note dated December 23. Still, Moody’s said the company believes that “due to its strong market position” it will be able to extend its bank liabilities.
Tianqi would be far from being the first commodity company to devour assets at the start of a cycle just to put pressure on itself when prices fall. A famous example was the purchase of Alcan Inc., boosted by Rio Tinto Group’s debt, in 2007, shortly before the global financial crisis caused problems for the aluminum industry for a decade.
“A surplus of lithium products, increasing inventories and weaker-than-expected demand” from the electric vehicle sector in China and the USA put a burden on metal suppliers until the second half of 2019, according to Galaxy Resources Ltd. 23 The company would cease mining and production in Western Australia. At the beginning of 2020, the market will continue to be put under pressure by excess inventories.
The long-term outlook could be better as many planned projects have stalled due to lack of funding. This means that the market may have a deficit again in the middle of the decade as according to Galaxy, demand from automakers is increasing.
The purchase of the SQM shares was based on “strategic requirements”, Tianqi said in a statement in June 2018. The investment will bring stable returns in the long term and improve Tianqi’s commitment to SQM’s world class resources, it said. Tianqi is headquartered in Chengdu, Sichuan Province, and has a 51% stake in the Greenbushes lithium mine in Western Australia.
According to Daniel Chen, an analyst with the CRU Group consulting firm, the lithium market is paying close attention to Tianqi because it took on so much debt to continue buying when prices were very high.
“I think Tianqi saw the SQM transaction as a unique opportunity,” he said. “And if they don’t take the risk, it will never happen.”
– With the support of Apple Lam, Crystal Chui and David Stringer.
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