The IGO Ltd (ASX: IGO) share price could find favour with investors when it resumes trading after a broker upgraded the stock.
The IGO share price last traded at $5.10 when it went into a trading halt on Monday to announce a $766 million capital raise to fund an acquisition.
ASX shares that go cap in hand to investors tend to come under pressure from the discounted new share sale.
IGO share price upgraded
But IGO get just get a warmer reception as Jarden upgraded the nickel miner to "outperform" from "neutral".
The broker turned bullish on the IGO share price despite the large dilution from the raise as it believes IGO's expansion into lithium is a "game changer" for the miner.
IGO said it would buy a 49% stake in Tianqi Lithium Energy Australia Pty Ltd from China-listed Tianqi Lithium Corporation.
IGO acquisition details
The acquisition comes with a US$1.4 billion ($1.9 billion) price tag and will give IGO a 24.99% indirect interest in the Greenbushes Lithium Mining and Processing Operation (Greenbushes) and a 49% indirect interest in the Kwinana Lithium Hydroxide Plant (Kwinana). Both assets are located in Western Australia.
Jaden listed seven reasons why it likes the deal as it upgraded the IGO share price.
"Transacting at the bottom of the cycle from a forced seller [and] buying into a sector with a strong structural growth thematic," said the broker.
Reasons to like the IGO transaction
It also removes the uncertainty around what IGO will acquire to drive growth. The sector doesn't have a good track record in making value accretive mergers and acquisitions.
The deal will also address the short mine life of its flagship asset, the Nova nickel mine, which can only produce for another six-odd years. Miners with limited life assets tend to trade at a discount to the market.
IGO is also buying into a world class asset that has scale, grade, low cost and growth potential.
Buying knowhow at a bargain price
Jarden also pointed out that the ASX miner will be partnering with lithium industry heavyweights that can teach IGO a thing or two in operating lithium assets.
Further, the assets offer fully integrated lithium hydroxide production that maximises margin potential across the supply chain.
Finally, Jarden believes IGO paid a very attractive price for a stake the assets.
IGO target price upgraded
"Under a scenario of ramped‐up ~2025 production, 'normalised' lithium pricing, and IGO's value attribution among the assets based on Kwinana at sunk capital (US$700mn, 100%), the acquisition prices Greenbushes at ~8.0x EV/EBITDA and Kwinana at ~3.3x," explained Jarden.
"These multiples are below global peers(FY22E ~7‐78x), while also inherently conservative in that they are based on committed near term expansions, not long term expansion aspirations supported by Resource, offering further earnings and value accretion."
The broker lifted its IGO share price target to $6 from $4.90 a share even after it accounted for the dilution from the cap raise.
