Arcadium Lithium (NYSE: ALTM) stock soared in Monday's trading. The lithium mining and processing specialist's share price closed out the day up 35.6% and had been up as much as 42.9% earlier in the session.
Arcadium's valuation surged following following confirmation that the company is a potential acquisition target for Rio Tinto Group (NYSE: RIO) -- the world's largest mining company. Rio Tinto published confirmation yesterday that it had approached Arcadium about a potential buyout, but no financial specifics about the offer were disclosed.
Rio Tinto has made a nonbinding offer to acquire Arcadium. Neither party has mentioned any financial specifics related to the offer, and both parties have stated that they will not provide additional comments until an update is appropriate.
Lithium is a key component in batteries used in electric vehicles and consumer electronics and has a strong demand outlook over the next decade and beyond. On the other hand, a production glut from Chinese suppliers has been pressuring lithium prices in recent years. Acquiring Arcadium would make Rio Tinto one of the world's largest lithium producers.
Investors should approach Arcadium Lithium stock with the understanding that there's no guarantee that the company is on track to be acquired by Rio Tinto. Additionally, the lack of financial specifics means there's a risk that the company could be purchased at a level that delivers little or no upside compared to the lithium-mining specialist's current share price.
On the other hand, Rio Tinto or another mining player could wind up paying a premium significantly above current valuation levels, even after today's big pop for Arcadium stock. It's also possible that Arcadium could continue to operate as a stand-alone business and go on to deliver strong returns for long-term shareholders. The company anticipates a 25% annual increase for combined lithium hydroxide and lithium carbonate sales volumes this year, and the recent acquisition offer likely signals that Rio anticipates a favorable shift in lithium pricing trends.
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Keith Noonan 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.