Wesfarmers' soft bid for Kidman spotlights lithium's financing issues

By Melanie Burton

MELBOURNE (Reuters) - Wesfarmers Ltd's bid for Australia's Kidman Resources undervalues the lithium miner, analysts said on Friday, reflecting the financing difficulties the sector faces even as electric car makers warn of raw material shortages.

Wesfarmers offered a 47 percent premium for Kidman, which is developing the Mount Holland project in Western Australia through a joint venture with battery chemicals maker Sociedad Quimica y Minera de Chile S.A. (SQM).

But even that offer, which valued the company at A$776 million ($543 million) or A$1.90 per share, undervalued the company, said analysts at J.P. Morgan and Canaccord Genuity.

Prospects for lithium demand look strong over the next decade as governments worldwide set ambitious targets to increase electric vehicle sales.

In May 2018, Kidman signed a lithium supply agreement with electric carmaker Tesla, which this week forecasts a shortage of key electric vehicle minerals occurring in the future.

JP Morgan said that Wesfarmers' share price bid "fundamentally undervalues" Kidman's share of the joint venture, adding that Mount Holland is a "Tier-1" project.

Canaccord said the bid "falls short" of their valuation of A$2.15 per share for Kidman.

Both companies say there is the potential for a third party to place a higher bid for Kidman.

"The chance of an interloper seeing greater value in Kidman, either joint venture partner SQM or an outside party, is real," said JPMorgan.

Kidman shares closed on Friday just below the offer price at $A1.87.

Part of the reason for the lower valuation stems from problems the lithium mining sector has faced in gaining financing for their projects.

The Mount Holland site reportedly will require about A$600 million in capital. SQM has pledged $100 million to the project.

Miners have struggled with financing as retail equity markets do not provide the scale of funding they need and banks have been reluctant since it is not easy to hedge their lithium price risk.

"It's next to impossible to hedge so therefore project financing becomes really difficult," said Aaron Ross, global head of resources at ANZ at an industry event in Melbourne.

Large auto and battery makers could seek equity stakes in companies instead of signing supply off-take agreements, as Chinese companies have done, said Ross.

Diversified miners that have started to accumulate cash could also step in, with Rio Tinto, South 32 and Fortescue all looking to get into lithium, said Reg Spencer, mining analyst at Canaccord, with Rio Tinto best placed because it already has lithium exposure.

"It's perfect timing really from Wesfarmers. It's hard, the banks and not many other people are prepared to fund those things at the moment," said Andy Forster, senior investment officer at Argo Investments, adding that Mount Holland is one of the better lithium projects around.

"I'd be surprised if anyone else came over the top, but never say never."

(Reporting by Melanie Burton; editing by Christian Schmollinger)