Rio Tinto has agreed to acquire Arcadium Lithium in a $6.7billion (£5.1billion) deal, which is set to make the FTSE 100 group the world's largest lithium producer.

The mining giant said it would purchase the Philadelphia-based company for $5.85 per share, a 90 per cent premium to its closing share price on Friday.

Formed in January from the merger of Allkem and Livent, Arcadium Lithium operates mines and processing facilities across multiple countries, including China, Argentina, Australia, and the US.

It currently produces 75,000 tonnes of lithium carbonate equivalent per year but has plans to double capacity by the end of 2028.

However, the group's market capitalisation has more than halved from $10.6billion to around $4.6billion this year amid a sharp decline in lithium prices.

Rio Tinto said the takeover of Arcadium was the 'right timing', given the significant drop in lithium prices and the expectation that demand for the metal will increase.

The element's price peaked at about $81,000 per tonne in November 2022 yet has since plummeted by more than 90 per cent due to a supply glut and subdued demand for electric vehicles in key markets.

Lithium and its compounds are commonly used in rechargeable batteries for EVs, making it a key element in the energy transition, along with copper and aluminium, which are both heavily mined by Rio Tinto.

Jakob Stausholm, its chief executive, said the Arcadium acquisition was a 'significant step forward' for the FTSE 100 company.

He added: 'This is a counter-cyclical expansion aligned with our disciplined capital allocation framework, increasing our exposure to a high-growth, attractive market at the right point in the cycle.'

The takeover is set to be finalised in mid-2025, dependent on Arcadium Lithium investors representing at least three-quarters of all voting rights approving the deal.

Matt Britzman, senior equity analyst at Hargreaves Lansdown, said: 'It's a good time to shop for counter-cyclical assets, and this deal helps propel Rio's lithium portfolio to new heights, with it already having exposure through its Rincon and Jadar projects.

'This so-called white gold, a key component in the energy transition with uses in areas like electric vehicles, is the material that differentiates Rio from key rivals like BHP.'

In May, Australia-headquartered BHP abandoned its attempt to acquire fellow miner Anglo American after increasing its bid from £31billion to £39billion.

It would have been the mining sector's biggest acquisition deal in history had it been successful and created a global player in metals like copper, potash and iron ore.

Anglo objected to the proposed deal owing to concerns about its complexity and the demand to sell its South African platinum and iron ore divisions.

Rio Tinto shares were 0.5 per cent down at £50.20 on Wednesday morning, meaning they have fallen by around 13 per cent since the year started.