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Bacanora Lithium has big plans for Sonora

Snapshot

  • Sonora host to one of the world’s larger lithium resources
  • High-grade, with 5mln tonnes of lithium carbonate
  • Has 50% stake in Germany’s Zinnwald Lithium Project
  • Feasibility study values Zinnwald at €428mln
Electric vehicles

Quick facts: Bacanora Lithium Ltd

Price: 22.25 GBX

AIM:BCN
Market: AIM
Market Cap: £49.61 m
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What Bacanora Lithium does:

Bacanora Lithium Ltd (LON:BCN) is an AIM-listed company focused on developing the world’s next major lithium project in Mexico, with the metal a key component for batteries used in electric vehicles.

The company is rapidly commercialising the world-class Sonora Lithium Project in Mexico which benefits from a large, scalable and high-grade resource indicated at over 5mln tonnes of battery grade (99.5%) lithium carbonate equivalent (LCE).

In Europe, Bacanora also has a 50% interest in, and joint operational control of, the Zinnwald Lithium Project, located approximately 35km south-east of Dresden in the eastern part of Germany.

Zinnwald represents a strategic asset located in close proximity to a thriving market for lithium and energy products, which is being fuelled by Germany’s electric automotive industry and the rise of renewable energy storage.

 

What it owns

Sonora

Bacanora has built a lithium carbonate pilot plant in Hermosillo to upgrade and process ores from Sonora.

The plant includes the full metallurgical flow sheet of pre-concentration, flotation, roasting and lithium carbonate precipitation.

Bacanora has been looking for investors to help fund construction of the mine, which has been estimated to cost US$460mln in its first phase.

In May 2019, Chinese Ganfeng invested at 25p per share for a 29.9% stake in Bacanora, but also took a 22.5% direct stake in the Sonora lithium project in Mexico that can rise to 50%.

If Ganfeng exercises its full 50% option over Sonora, the amount needed has effectively been halved said Peter Secker, Bacanora’s chief executive.

In November 2019, fund manager M&G raised its take to 19.9% through a US$10mln placing.

While the company had to place its pilot plant at the project under care and maintenance in March due to the coronavirus, it is now planning to reopen the Hermosillo plant in June.

Meanwhile, kiln optimisation testwork focusing on waste hear recycling and kiln retention time is ongoing in the US, with kiln design and engineering work completion now scheduled for the end of the third quarter of 2020.

 

Development phase

The first phase at Sonora will see the construction of a 17,500 tonnes per annum (tpa) Li2CO3 (lithium carbonate) operation.

Through the deal, Ganfeng can also acquire 50% of all Sonora’s lithium production during phase 1, with an option to increase this offtake to 75% in phase 2 when production will rise to 35,000tpa.

Bacanora had already arranged finance of US$240mln – including a US$150mln senior debt facility with RK Mine Finance and a US$25mln equity commitment from offtake partner Hanwa.

A US$65mln equity commitment from the State General Reserve Fund of Oman expired in July 2018 and talks are underway about renewing the agreement.

 

Zinnwald

Bacanora owns 50% of the project, while the other half is held by Solarworld AG, which is currently in administration.

Bacanora has committed to provide a minimum of €1.35mln in funding to the project over the next two years.

A feasibility study for its Zinnwald project in Germany indicates 94,000 tonnes of reserves and a net present value of €428mln.

Costs to build the mine at Zinnwald were estimated at €159mln, which will be paid back after six years of the estimated 30-year mine life.

The mine is predicted to generate an average €58.5mln in earnings each year over its life after all-in operational costs of €13,665 per tonne of battery-grade lithium fluoride, which includes chemical processing costs of €7,450 per tonne.

 

How it is doing

For the six months to December 2019, pre-tax loss was £4.9mln, down from the £11mln lost during the corresponding period in 2018.

The loss includes US$2.8mln of general and administrative costs, and share-based payment compensation of US$300,000. The overall loss was lower due to reduced corporate overheads.

During the six month period, the company incurred costs of US$2.4mln in relation to debt financing. Finance income of US$900,000 comprised a revaluation of the company’s financial warrants and interest on cash reserves.

 

What the boss says: Peter Secker, chief executive

"As anticipated, Ganfeng has quickly demonstrated its commitment to Sonora and initiated a review on the stage one engineering and design capital costs, with a view to optimising the associated costs and the timetable to construction."

"This work is taking place in tandem with the front-end engineering design work instigated by the company which continued to advance throughout the period."

"We remain fully committed to our two high-quality lithium projects and look forward to all our shareholders and stakeholders reaping the rewards in the years to come as both projects in turn, generate significant returns."

 

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Inflection points

  • The company is predicting that lithium demand will grow by 800% by 2030 
  • Bacanora is in the process of raising US$460mln of funds for Sonora, but only needs to raise half of that money if Ganfeng takes up its option to acquire 50% of project
  • Within six months of that Ganfeng would complete a review of the current EPC engineering design to cut the US$420mln capital cost of Sonora and accelerate construction timetable
  • Based on the results Ganfeng would assist with finalising an EPC engineering contract for the mine and plant construction and help with commissioning
  • First production scheduled for the second half of 2021
  • Zinnwald valued at €428mln
  • Plan is to list German business Deutsche Lithium separately

 

Blue Sky

"The backdrop for lithium and the shift towards electric vehicles continues to gain momentum with rising EV sales in Europe despite the impact of lockdown, up 57% YoY in Q1 2020, as well as major new investment planned by the EU which implies significant demand growth over the medium to long term. This will of course feed through to demand for raw materials and we see recent weakness in the sector as a significant buying opportunity within a larger, long term structural shift", said analysts at VSA Capital in a note on 28 May 2020.

The broker rates Bacanora at 'buy' with a 114p target price.

 

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