Australian mining groups Orocobre and Galaxy Resources plan to merge in a A$4bn (US$3.1bn) deal that would create one of the world’s largest lithium producers as rising demand for electric vehicles turbocharges prices for the metal.

The Australian Securities Exchange-listed companies said on Monday the combined business would establish a diversified production base across Australia, South America and Canada, as well as boost the groups’ financial firepower and capacity to grow more rapidly.

Together, Brisbane-based Orocobre and Perth-headquartered Galaxy would be the world’s fifth-largest producer of lithium, which is an important material in electric vehicle batteries. The two companies said they had the potential to expand annual production of lithium carbonate, a processed form of the raw material used in batteries, from 40,000 to 100,000 tonnes in the next few years.

“The transaction will allow the group to materially accelerate the development of our combined growth projects,” Simon Hay, Galaxy chief executive, told investors. “And this growth is perfectly timed to meet the demand surge coming from our customers.”

Shares in Orocobre rose almost 5 per cent following the deal’s announcement, while those in Galaxy added 2.7 per cent.

Between them, Galaxy and Orocobre are planning several big development projects, including Olaroz and Sal de Vida in Argentina and James Bay in Canada, which analysts forecast will require more than A$1bn in capital expenditure.

The merged company would be headquartered in Argentina, where Orocobre operates the Olaroz lithium facility, and have $487m in cash on its balance sheet.

“The combined entity will have materially increased liquidity and improved access to capital, which we see as a major enabler to delivering accelerated growth plans,” said Reg Spencer, an analyst at an investment bank Canaccord Genuity.

Canaccord said it would consider upgrading its current production forecasts for both companies of 130,000 tonnes of lithium carbonate in 2025 if the merger goes ahead.

The global market for lithium has bounced back after two years of depressed prices, prompted by concerns of a supply glut from a flurry of mine expansions.

Lithium carbonate prices have soared about 70 per cent this year on strong demand for electric vehicles, according to Macquarie. The bank forecast further price increases of 30-100 per cent over the next four years, as electric vehicles begin displacing the 1bn or so internal combustion engines in the world.

“Our bullish electric vehicle demand outlook sees the lithium market move to [a] deficit in 2022 with material shortages emerging from 2025,” said Macquarie in a recent note.

Under the proposed merger, which has been endorsed by both companies’ boards, Galaxy shareholders would receive 0.57 Orocobre shares for each Galaxy stock. Orocobre shareholders would own 54.2 per cent of the combined entity, with Galaxy investors holding the remainder. The merger is subject to shareholder approval.

Martín Pérez de Solay, Orocobre chief executive, will lead the combined group. Galaxy’s Hay will become president of the merged entity’s international business and report to de Solay.

“The company will have a very, very strong balance sheet and that will enable us to raise debt whatever it is required to develop projects . . . quickly,” said de Solay.

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