Wesfarmers Ltd (ASX: WES) announced a bid to acquire 100% of Kidman Resources Ltd (ASX: KDR) yesterday morning. Does this acquisition make any sense?
About Wesfarmers and Kidman
Wesfarmers is a 100-year-old conglomerate which at various times has owned and operated some of Australia’s largest retail brands such as Kmart, Target and more. Today, its largest business is Bunnings Warehouse, the number-one DIY home improvement business.
Kidman’s major asset is a 50% interest in the Mt Holland lithium project based in Western Australia, which is jointly owned with one of the world’s largest producers and makers of lithium products, Sociedad Quimica Minera De Chi (NYSE: SQM).
Why All The Hype Around Lithium?
Lithium producers have been popular investments over the last couple of years because of the rise of electric vehicles. Most electric vehicles rely on lithium batteries so if EV’s are going to take over the world, we’re going to need a lot of lithium.
But Kidman isn’t the only company mining lithium. There are plenty of others like Pilbara Minerals Ltd (ASX: PLS) and Galaxy Resources Ltd (ASX: GXY) competing in the space. So strong is this hype around lithium that when Wesfarmers announced the bid to acquire Kidman, the Pilbara Minerals share price actually soared 9%. Investors seem to be hoping Pilbara will get an offer too.
Kidman Is Still A Price-Taker
Kidman’s performance relies on the price of lithium. They are, like all other resource companies, a price-taker. While lithium stocks got a boost over the last few years, the actual price of lithium declined between June and December 2018. From June to October, the Kidman share price went from $2.43 to just $0.84. That’s scary, and not the sort of investment I like to make. Wesfarmers is putting a lot of faith in the electric vehicle market and assuming that the increase in electric vehicles will steadily push the price of lithium higher.
My other issue with this acquisition is that Wesfarmers is paying a huge premium to the market price. Yesterday, the Kidman share price reached $1.87. It was last at $1.87 in July last year – yes, about the same time lithium prices started falling. Wesfarmers is essentially paying a price that assumes a lithium price far higher than the actual price today.
To me, this acquisition of a cash-flow negative resource company doesn’t make much sense, but maybe I’m missing something.
Personally, I’d rather invest in one of the proven companies mentioned in the free report below.
3 Proven Growth Companies
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Disclaimer: At the time of writing, Max does not own shares in any of the companies mentioned.
