Rio Tinto CEO's Big Test: What to Do With Lithium — Analysis

By Rhiannon Hoyle and Adam Whittaker

Rio Tinto last year bet big on lithium. Its new chief executive officer will next week set out whether the commodity has a prominent future at the world's second-largest mining company.

Simon Trott, who took charge of Rio Tinto in August, has promised changes that analysts speculate could include asset sales, cost cuts and slower developments. On Thursday, he will lay out a detailed vision for the company for the first time at an investor gathering in London.

"The changes we are making are not incremental--they are fundamental," Trott told employees last month in a memo seen by The Wall Street Journal.

Under former CEO Jakob Stausholm, Rio Tinto agreed to a $6.7 billion takeover of Arcadium Lithium a year earlier. That deal was completed in March. Rio Tinto also pushed hard to advance a lithium project in Serbia that would have been among the biggest in Europe.

Rio Tinto's interest in lithium, used to make batteries, was in contrast to other major miners that couldn't envisage the commodity generating significant profits like the kind they can make producing industrial metal copper or steel ingredient iron ore.

Signaling a shift in priorities, Trott has already mothballed the Serbian project. Paul Graves, the head of Rio Tinto's lithium business and formerly CEO of Arcadium Lithium, is also leaving the company as Trott assembles a core group of leaders.

Investors don't expect Trott to back out of lithium entirely. Instead, they think he will refine the company's pipeline of lithium projects, with developments happening more slowly than originally planned.

"As western demand for lithium increases, Rio should be best placed to fulfill this demand as supplier of choice, versus the rest of the industry which are small scale players or balance-sheet constrained," said Stephen Butel, a portfolio manager at Platypus Asset Management.

Lithium has to compete for capital with Rio Tinto's other big businesses, notably iron ore. The company owns large Australian iron ore mines and is developing a vast new pit in Africa with Chinese partners.

The company also has a massive copper project planned in the U.S. that, if approved, would likely take precedence over lithium, said RBC Capital Markets analyst Ben Davis in a note.

Over the past five years, the miner has made roughly $15 billion of acquisitions, Goldman Sachs analyst Paul Young said in a note. Yet, since 2018, it has sold assets valued at less than 1 billion Australian dollars, equivalent to $653.3 million.

As a result, the company now has up to 20 projects in development and is operating and exploring in over 30 countries across more than 10 commodities, said Young.

Trott could cut costs and reduce debt by selling some assets and focusing on its largest and most-profitable operations, he said.

Already, Trott has begun a strategic review of Rio Tinto's borates operations in California, and an iron and titanium business in northern Quebec.

"I think if you try and do everything, you get nothing done," he said at a Goldman Sachs conference last month.

Goldman's Young thinks Rio Tinto's Canadian iron-ore business, Pacific Aluminium operations and recently acquired stake in North American recycler Matalco, among others, could be sold. That list also includes several lithium plants and the shelved Serbian project, called Jadar.

One key unknown is whether Trott will be in a position to address an issue that has long irked shareholders: the nearly 15% stake in Rio Tinto's London-listed stock owned by Aluminum Corp. of China, known as Chinalco. That holding has stopped the miner from buying back shares due to an Australian government-imposed cap on the state-owned Chinese company's interest.

A solution could be an asset-for-equity swap, which wasn't ruled out by Rio Tinto at its first-half results in July, said Young.

"I think they see it as a problem," Ninety One portfolio manager George Cheveley said of the Chinalco stake. But he doesn't think Trott will necessarily plot a path to fixing it. "I think they'll just solve it at some point."

Write to Rhiannon Hoyle at rhiannon.hoyle@wsj.com and Adam Whittaker at adam.whittaker@wsj.com