The Serbian government has pulled, cancelled, all of the permissions and licences for Rio Tinto PLC’s (LON: RIO) lithium mine at Jadar. Rio’s shares open 2.5% down in London, following the 4% decline on the Australian market on the news (ASX: RIO).
One reading of this is that it is a body blow to Rio Tinto’s ambitions in the lithium space – it’s a $2 billion and more project at Jadar and the aim was to make Rio one of the top 10 lithium producers late this decade.
It’s also possible to read this the other way around. This could be of benefit to Rio.
One way to construct this argument is that Rio Tinto’s ambitions in that lithium market were destined to work badly anyway. This is often a feature of minor metals markets – there’s a lot more out there of the right minerals than most seem to think. So, when there’s an investment boom global supply rises by more than global demand does. Sure, this doesn’t always happen and perhaps the EV revolution will mean that it won’t. But it does often happen – everyone decides that this is the next big metal, piles in and more mines open than factories using the stuff. We could note that this is currently happening with lithium itself. The last big investment boom was 2013 and following, off the back of that EV story again, and some of the mines then financed have since gone bust. Altura Mining (OTCPK: ALTAF) for example.
Opinions, as they say, differ on that. But it’s also true that Rio Tinto’s lithium ambitions in Serbia, that Jadar mine, were facing problems anyway. The massed environmentalists were delaying the mine opening at least by a year. It wasn’t entirely obvious that Rio would actually be able to get it through over those objections.
Now, with the Serbian government cancelling those permits for the Jadar lithium project Rio Tinto has an out. Yes, realise that this sound an absurdity to start with but this is in fact true to a certain level. If Rio Tinto just couldn’t quite get the Jadar lithium mine over the local environmental objections then all the costs so far – mine development is an expensive business – are simply a straight loss to Rio Tinto. But if the government revokes licences then there’s a court case – actually, arbitration under the usual ISDS rules – to be able to reclaim those sunk costs.
In fact, the usual investor state dispute resolution arbitrations allow a claim for profits lost as a result of state action that is in breach of those investment treaties.
If Jadar failed just because lithium wasn’t so exciting, or because locals delayed it and make it unworkable, then Rio Tinto has to eat the losses. If it’s the Serbian government that pulls the rug on Rio’s Serbian lithium then there’s a good argument that Serbia has to compensation Rio Tinto.
It might be a little early to try and trade on this idea and it is a little bit of a stretch even though not that much of one. It’s not wholly and entirely obvious that the Serbian cancellation of Jadar is bad news for Rio Tinto.
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Tim Worstall is a freelance writer specialising in economics and the financial markets.