Bacanora Lithium’s prospects framed by Boris Johnson’s green plans

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Boris Johnson’s pledge to bring forward the UK’s switch to electric vehicles by ten years to 2030 raises many questions.

How they will all be charged up at the same time is one, but for companies that produce lithium the PM’s commitment was just a further underscoring of the potential that lies ahead.

Bacanora Lithium PLC (LON:BCN) is one of these potential beneficiaries. The AIM-listed group is developing the Sonora deposit in Mexico and it reckons is one of the best lithium projects around anywhere.

Lithium is the raw material that will power the batteries in electric vehicles and demand is predicted to surge when global usage really starts to hit its stride.

On current predictions that is going to be around 2023, which happily for Bacanora is roughly when Sonora is set to come fully into production.

The company received a major boost earlier this month when Chinese partner Ganfeng Lithium exercised an option to take its direct stake in Sonora to 50%.

Ganfeng is China’s largest lithium producer and one of the top three in the world.

As well as underlining Ganfeng’s commitment to the project, the additional cash of GBP21.9mln added another layer of financial certainty as it moves towards construction.

Building a new mine anywhere is not cheap and Sonora is no exception.

Current forecasts are for the first phase to cost US$420mln, though this is likely to fall once Ganfeng, which is the contractor, does its final sums.

Bacanora already has US$150mln committed for its share of the building costs though existing loan agreements, leaving around US$60mln to find to meet its commitment.

A feasibility study put a value of US$910mln on Sonora and with Ganfeng showing it is fully on board, arranging the finance for the remainder should be much more straightforward.

Broker VSA agrees and said that even though Bacanora now has exposure to a lower proportion of the Sonora project, the structure of the project financing is likely to be far more favourable to its shareholders.

Dilution will be lower due to a smaller equity financing at company level, said the broker.

“We had previously assumed that around US$100m would need to be raised as equity at the BCN level. That now appears to be more like US$60m.”

Ganfeng is also a major shareholder in Bacanora and assuming that it and other big shareholders such as M&G maintain their stakes almost half of this is covered leaving a substantially lower quantum to be covered by the remaining or new shareholders.

“Indeed, Hanwa who hold 5.51% remain committed to US$25m of the project financing in 2018 meaning that there is a clear pathway to securing the full project funding,” said VSA.

“This appears highly achievable in our view particularly given the stronger outlook for transitional energy and the strengthening backdrop for lithium.”

Peter Secker, Bacanora’s chief executive, was delighted by Ganfeng’s decision.

“Their [Ganfeng] investment further de-risks the Project and reduces the equity demands on Bacanora’s own shareholders to fund Phase 1 of the Project,” he said.

Wang Xiaoshen, Ganfeng deputy chairman, added: “We have been working with Bacanora on the exciting Sonora Lithium Project for over two years and are delighted to be increasing our investment.”

The shares reacted positively to the news and given, which has virtuous circle effect and further derisks the project as the higher the price any financing it is executed the more benefit for investors.

VSA noted that Ganfeng’s financial position has greatly improved recently having raised HK$1.5bn (US$190mln) while its share price has risen by 120% this year so far to give a market value of US$14.7bn.

Sonora is not Bacanora’s only project: The company has an indirect interest in the Zinnwald deposit in Germany, which lies close to the manufacturing plants of the major German car groups.

However, a restructuring in October saw the stake in Zinnwald injected into fellow AIM-listing company Erris Resources in return for a substantial equity stake and a royalty on any net profits.

As Erris raises additional finance to develop Zinnwald, Bacanora’s stake is likely to fall but the deposit had a value put on it of US$428mln in a study based on a thirty-year mine life, which suggests its interest and royalty can add value going forward.

There are risks. Reports of Mexican politicians wanting to nationalise the lithium business circulated in June but unions are opposed and the country already has a long history of mining gold, silver and other metals.

Alternatives to lithium might also be developed, but it is hard to see happening in the near-term.

Financing is also a hurdle but with the pieces falling into place here and EVs set to become commonplace very soon Bacanora is in a good place to clear this.

VSA has put a value of 118p per share on Bacanora currently which is almost three times the current market price of 38.5p even after the recent gains.

At that price, the company is valued at GBP86mln.

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