By Melanie Burton and Harish Sridharan
MELBOURNE (Reuters) -Australia's Liontown Resources said it had knocked back an approach from the world's biggest lithium producer Albemarle (NYSE:ALB) Corp on Tuesday that valued the lithium developer at A$5.50 billion ($3.7 billion) and sent its shares rocketing 59%.
Liontown controls two major lithium deposits in Western Australia, including its flagship Kathleen Valley project slated for first production in mid-2024, which is among the world's largest and highest-grade hard rock lithium deposits.
North Carolina-based Albemarle is the world's biggest lithium producer with major facilities in Chile, China and Western Australia where it holds stakes in two mines and is building a lithium hydroxide processing plant near Perth.
The takeover approach could signal the start of sector consolidation, analysts said.
Benchmark lithium prices rallied six-fold over the two years to November but have since plunged 62%, representing an opportunity for majors to secure supplies for the coming decade to meet surging demand from automakers switching to electric vehicles.
Liontown has inked supply agreements with Ford Motor (NYSE:F) Co, Tesla (NASDAQ:TSLA) and the battery unit of South Korea's LG Chem.
Brenton Saunders, a portfolio manager at Pendal Group, said a cost review made Liontown look vulnerable.
The cost of building Kathleen Valley nearly doubled to A$895 million from a 2021 estimate amid rising labour rates, Liontown said in January. It warned further increases were possible but said it did not expect to need extra funding until the December quarter.
"For Albemarle it's not a riskless deposit. There are a lot of firsts in this project, it's an underground lithium mine and the labour market is still very tight," Saunders added.
Albemarle had offered A$2.50 per share after two previous offers, Liontown said in an exchange filing. The approach represented a 63.9% premium to the ASX-listed company's last close.
Liontown said its board had unanimously determined that the proposal "substantially undervalues" the company and was not in the best interests of shareholders.
"There's no obvious synergies that Albemarle has that other miners won't - it's logical that there could be others who are interested," said Dan Morgan, an analyst at Barrenjoey in Sydney.
Of Liontown's two prior proposals from Albemarle, the first offer of A$2.20 per share was on Oct. 20 last year, and the second of A$2.35 was earlier this month, it said.
Albemarle said its "compelling" bid offered a material premium to Liontown shareholders who would benefit from its chemical conversion abilities and existing links with Liontown's customers. It called for Liontown's board to meaningfully engage.
Liontown also said RT Lithium Ltd, a subsidiary of Albemarle, had built a near 2.2% stake through on-market purchases.
($1 = 1.5033 Australian dollars)