If consummated, the deal would turbo charge Rio's rise to become one of the largest producers of lithium behind Albemarle and SQM, in its drive to supply the metal essential for EV batteries and power storage.
Reuters exclusively reported on Friday that the companies had been holding talks, and Arcadium could be valued at $4 billion to $6 billion or higher.
The approach was confirmed by both parties on Monday in separate statements that did not offer financial. It follows a sharp slump in lithium prices and months of speculation over a potential deal.
"The approach is non-binding and there is no certainty that any transaction will be agreed to or will proceed," Rio said in its statement. Both companies said they would not comment further.
Australian shares of Arcadium rallied as much as 50% before closing at A$6.09, up 46%, and sparked a jump in other Australian-listed lithium companies, with shares up 2% to 10%. Rio Tinto's shares fell 2%.
U.S.-listed shares of Arcadium surged nearly 35.4% before the morning bell.
The recent slump in lithium prices, due in part to Chinese oversupply, has pushed Arcadium's shares down more than 50% since January, making it an attractive target. But lithium demand is forecast to surge later this decade from growth in lithium-ion batteries.
By buying Arcadium, Rio would gain access to lithium mines, processing facilities and deposits in Argentina, Australia, Canada and the United States to fuel decades of growth, as well as a customer base that includes Tesla, BMW, and General Motors.
The combined group could account for some 10% of global lithium chemicals supply by 2030, analysts at Canaccord said.
Rio's own Rincon project in Argentina is due to start producing later this year, while its huge Jadar project in Serbia could take two years to secure permits to go ahead.
HEFTY PREMIUM EXPECTED
Andy Forster, a portfolio manager with Argo Investments, which holds shares in both companies, sounded a cautious note around high valuations for Arcadium, noting it had many growth projects but not the balance sheet to build them.
"The economics of long term pricing for lithium is not what it has been," he said.
Another institutional holder of Arcadium said a bid by Rio at the top end of the reported range would "get the deal done".
Analysts at TD Cowen highlighted they expect Arcadium's output to grow by 78% over the next three years, which would give it earnings of $1.3 billion in 2028.
"While we see no need for ALTM to sell, we imagine that valuation conversations would need to begin at $5+/share," they said in a note on Oct. 4 after Reuters' report on Rio's talks. That would imply a premium of at least 60% on Arcadium's close of $3.08 on Oct. 4.
However, Blackwattle Investment Partners in a letter to Arcadium said any offers in the reported range would "significantly undervalue" the lithium company.
"In our opinion, a sale price for LTM should be closer to $8 billion, and LTM should be willing to walk away from an opportunistic offer," Blackwattle said.
Arcadium was well placed to weather the storm in prices which look set to recover, partner Michael Teran of Blackwattle Investment Partners said, since it has delayed development of some Argentinian and Canadian projects and has avenues to secure new funding opportunities for existing ones.
"This is one of our biggest worries that someone like Rio comes and takes it right at the bottom and you miss out on all of the upside when stocks have already taken a beating," Teran said.
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