Did Rio Tinto (ASX: RIO) Overpay for Arcadium Lithium (ASX LTM)?

Did Rio Tinto overpay with its $9.9 billion AUD acquisition of Arcadium Lithium, or could this bold move be one of the best deals we've seen in recent times? Paying a 90 per cent premium over Arcadium’s recent closing price might seem hefty, but Rio is clearly banking on the long-term growth of lithium, which is projected to become a $10 billion annual industry. To assess whether this was a smart play for Rio, let’s break down the key components of the deal.

Is Rio Tinto currently undervalued?

First, let’s consider what Rio actually acquired. Beyond Arcadium’s vast mining operations, the true value lies in its advanced extraction technology, which could be a game changer. Add to that the fact that lithium prices are currently hovering around all-time lows, and the timing of this deal starts to look spot on. If lithium prices bottom out and begin to rebound, Rio stands to benefit not only from Arcadium’s operations but also from a higher market price for the commodity. If this scenario unfolds, it begs the question: is Rio currently undervalued?

Since mid-2021, Rio has been trading sideways, struggling to break through its July 2021 all-time high, despite several attempts this year. This extended period of stagnation has likely caused some investors to doubt the stock's upside potential. However, with one of its strongest monthly gains in September—its best since late 2022—Rio could be setting up for a breakout to new highs.

For that to happen, the stock will need to push above the $131 mark soon. If it doesn’t, the recent bullish surge from September may prove to be more speculative than solid. Still, with this major acquisition in play and increased buyer interest, Rio presents a potential trading opportunity. I’d recommend keeping a close eye on both Rio’s stock and the lithium price for signs of upward momentum.

What were the best and worst-performing sectors last week?

The best-performing sectors included Information Technology, up 2.46 per cent followed by Financials, up 2.40 per cent and Healthcare, up 1.66 per cent. The worst-performing sectors included Energy, down 1.87 per cent, followed by Materials, down 1.43 per cent and Real Estate, down 1.13 per cent.

The best performing stocks in the ASX top 100 included Arcadium Lithium, up 95.69 per cent, followed by Block Inc, up 9.10 per cent and Pro Medicus, up 4.03 per cent. The worst-performing stocks included James Hardie, down 5.71 per cent, followed by Pilbara Minerals, down 5.57 per cent, and Ampol Limited, down 4.70 per cent.

What's next for the Australian stock market?

Last week saw the buyer’s return, lifting the All-Ordinaries Index by just under one per cent. However, volatility noticeably decreased compared to the previous week, raising the question of whether buyers are becoming more cautious at current levels.

One reason for this caution is the escalating conflict between Iran and Israel, which could blow into full-scale war at any moment. Additionally, in China, the initial excitement over stimulus measures is waning as doubts grow about their effectiveness in reviving consumer sentiment. Talks of more stimulus at the upcoming fiscal policy meeting on October 12 are already circulating.

These developments negatively impacted the Energy and Materials sectors last week, but Financials and Information Technology, which had recently declined, have now reversed and are trending upward.

In my previous report, I anticipated that the All-Ords would retrace for a week or two following its recent four-week rally. However, instead of declining amid global uncertainties, the index remained above the prior week's low and consolidated within a tight range.

This signals a bullish outlook, as sellers weren’t able to push prices lower, even with all the reasons to do so. Therefore, expect increased volatility this week and if the move is to the upside, we could see a quick push toward the 8,600 to 8,700-point level.

For now, good luck and good trading.

Dale Gillham is the Chief Analyst at Wealth Within and the international bestselling author of How to Beat the Managed Funds by 20%. He is also the author of the bestselling and award-winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good bookstores and online.