Is Rio Tinto (ASX:RIO) paying too much for the Rincon lithium project?

The iron ore producer’s shares have taken a hit amid its latest acquisition

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Questions about the $2 billion-plus bet on the Rincon lithium project appear to be weighing on the Rio Tinto Limited (ASX: RIO) share price.

Shares in Australia’s largest ASX iron ore producer tumbled more than 2% yesterday to $99.35 on the news. They are down a further 0.16% in early trading today.

In contrast, the BHP Group Ltd (ASX: BHP) share price dipped less than 1% yesterday and the Fortescue Metals Group Limited (ASX: FMG) slipped 1.8%.

Rio Tinto paying top dollar for Rincon

These doubts could hang around for a while yet as Rio Tinto is really making a double bet on the Argentinian lithium brine project.

At least one broker noted the full price that Rio Tinto is paying for Rincon. JP Morgan said the acquisition looked “relatively expensive”, reported The Australian.

In other words, for Rio Tinto to make a return on Rincon, it needs the lithium price to stay higher for longer.

Second bet on new extraction tech

The good news is that several experts believe supply of the battery ingredient will struggle to keep pace with demand.

But Rio Tinto’s investment also represents a bet on a yet-to-be proven new extraction technology.

The miner is banking on using a technology that will allow lithium to be extracted straight from brine. Current processes use the sun to dry out the brine into salt.

Rio Tinto believes its new process can significantly increase lithium recoveries when compared to solar evaporation ponds.

How much is Rio Tinto paying for Rincon?

The miner will pay US$825 million ($1.1 billion) for Rincon, which is owned by Sentient Equity Partners.

The price tag jumps to US$1.6 billion ($2.2 billion) when you add in the expected capital investment Rio Tinto needs to pump into the project.

Rincon is located in the so-called “lithium triangle” – an area in South America that is believed to be rich in the resource.

Need to diversify

Rio Tinto is aggressively diversifying to other commodities outside of iron ore. It identified lithium as a major opportunity that will give it leverage to the decarbonising world, and to improve its green credentials. This also explains why Fortescue is betting big on green hydrogen.

Rincon, along with its Jadar lithium project in Serbia, will allow Rio Tinto to produce 110,000 tonnes of lithium carbonate a year, reported The Australian.

This represents around 4% of projected global output, if you assume that Rio Tinto will meet all its production milestones.

Rincon is expected to produce 50,000 tonnes of lithium carbonate a year. But this could double as Rincon has secured the rights from local authorities to use more water to increase output.

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Motley Fool contributor Brendon Lau owns shares in BHP Billiton Limited, Fortescue Metals Group Limited, and Rio Tinto Ltd. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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