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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.
Lithium has been all the rage amongst AIM investors over the past few years, but the reality is that many of the projects which people have been getting excited about will fail to ever actually produce anything.
Some of these small outfits have seen crazy increases to their market caps as private investors were driven into a buying frenzy by very early stage exploration results, and then have fallen just as fast when people have woken up to the fact that actually extracting any lithium is many years down the line, if ever.
However, there seems to be no doubt that lithium has an important part to play in the future and its use will become even more widespread in batteries, with the potential for high levels of growth in demand – assuming of course that the price stays at a level which makes it viable for people to switch (such as in the case of electric/hybrid cars). I personally don’t see prices for the commodity reaching the highs that some have talked about, as few would be willing to, or could afford to, buy products containing lithium if that became the case.
What has surprised me with the ‘lithium rush’ on AIM is that many seem to have ignored the one company which is already at a fairly advanced stage and which is actually likely to reach full-scale production any time soon, that being Bacanora Minerals (BCN).
Fair enough, at a share price of 106p to buy and a market cap of £136 million odd it isn’t going to see the potentially huge overnight fluctuations in share price of the tiny outfits (nor can it be as easily manipulated by some of the characters who’ve been involved with pumping other companies). But at the same time a fair bit of risk has already been removed, and if the project turns out to be as good, and valuable, as it looks on paper, then there is still plenty of potential to make a large return by investing longer term and seeing it through to fruition.
Bacanora has already proven up the Sonora lithium project in Mexico, where it holds 100% of La Ventana, and 70% interests in Mexilit and Megalit, which all come under this area. A feasibility study has already been carried out which gives the project a net present value (8% discount factor) of in excess of $1.2 billion, and with life of mine operating costs of $3,910/t it is well insulated against fluctuations in lithium carbonate prices – especially given that the study was carried out based upon a flat commodity price of $11,000/t over the life of the mine.
At the end of 2017 typical prices in South America were around $14,000/t, significantly higher than the level the study was carried out at, and although I am far less bullish than some on where prices are going, I still certainly see them higher during the life of this mine.
There is also potential for further upside to its reserves, which currently stand at nearly 3.7 million tonnes on a proven and probable basis net to Bacanora, via the conversion of lithium still classed in the resources category.
Like any major mining project, actually getting it to the production stage won’t be cheap, and a staged development is going to see 17,500tpa produced for the first four years, at a cost of $420 million. Then stage two will see that increased to 35,000tpa, at a cost of a further $380 million.
Given that Japanese company Hanwa has already agreed to take between 70% and 100% of stage one production, and has acquired 10% of Bacanora, I would expect that some form of debt funding will be secured for the project. As part of this the company is looking to re-domicile from Canada to the UK, where access to funding is easier to secure, subject to shareholder and regulatory approvals.
Additionally, the company is also in the process of taking on another major investor, NextView Capital, which agreed in December to purchase 33 million shares at 94.53p to raise over £31 million, and to take this holding as a long term investment. That is yet to be completed, but the date for doing so has now been extended and it is on track.
Bacanora is making a loss – although it does generate some revenue from its Sonora pilot processing plant which has been operating for over two years – and burns through quite a bit of cash, but that is to be expected from a company at this stage.
In addition to Sonora, it does also have the Magdalena borate project, also in Mexico, but for the time being the company has decided not to invest any further capital into this project. It also has a 50% interest in Zinnwald in Germany, and although at an earlier stage and with further drilling required, it does already have measured and indicated resources, and Bacanora do have the option to acquire the remaining 50% following the completion of a feasibility study over the next 18 months or so.
There is still plenty of risk here, but I think that the upside potential is worth that, especially given that the shares have dropped back recently, having hit highs of 157p in early January, and I would be surprised to see them drop as low as the 94p placing price. This is one to buy and hold for the long term, as it has the potential to be big.
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