VSA Morning Miner, 08/02/21
Bacanora Lithium (LON:BCN)
Bacanora Lithium (LON:BCN) has announced a follow up to the US$65m financing with Ganfeng Lithium exercising its pre-emptive rights and increasing its position to 28.8% meaning that it remains BCN’s largest shareholder. In order to do this Ganfeng will subscribe for 53.3mn shares at the deal price of 45p/sh. which indicates US$31m taking the total funding in this deal to US$96m and the shares outstanding for the company to 384.1mn. The completion of Ganfeng’s investment remains contingent on certain approvals from China but we expect these to be received in due course.
The US$96m plus the US$28m previously paid for Ganfeng’s option exercise is around 28% of the project’s total funding requirement including working capital and contingencies of US$444m. We had previously conservatively assumed that a 60/40 debt to equity ratio would be used although noted that the project could tolerate a higher debt component. Given the nature of the deal and strengthening outlook for lithium, the higher debt component now appears more likely in our view.
Adjusting our model to fully reflect the recent cash injection and additional shares our target price of 120p/sh. is unchanged. It is worth highlighting that our modelling and valuation reflects a risked and attributable valuation for Sonora. We believe that the NPV8 of the project is US$910m of which BCN has a 50% interest. We also apply a 10% risk factor to reflect execution risk, however, we highlight that Ganfeng is arguably the leading lithium company globally which we believe minimises execution risk when combined with BCN’s team who have intimate knowledge of the project geology and successfully developed and operated the pilot plant.
We reiterate our Buy recommendation and 120p target price.
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