Bacanora Lithium (BCN) - Good Project, But Is Timing Right?

"You don't want to be investing in high-cost hard rock (lithium deposits) in Australasia; you want to be investing in low-cost, long-life strategic assets in South America that can feed into the Asian market", says Secker.

If this is the case, why doesn't the market seem enthralled by Bacanora Lithium? Let's start with the background story...

Bacanora Lithium, founded in 2008 and headquartered in the UK, is a lithium explorer that is focussed on identifying and investing in new lithium assets. There are two core projects: the Sonora Lithium Project in Mexico, and the Zinnwald Lithium Project in Germany.

In addition, Bacanora Lithium holds a 50% stake in Deutsche Lithium, which owns the c. 257 ha Zinnwald Lithium Project, with a 30-year mining licence; the c. 296 ha Falkenhain licence, with a 5-year exploration licence; and the c. 4225 ha Altenburg licence, with a 5-year exploration licence. The feasibility study for the Zinnwald Lithium project, published in June 2019, showed a pre-tax NPV of €428M and an IRR of 27%. However, Zinnwald is not a focus, nor is time or money being spent on it. Secker talks about a spin-out or a sale with the desire to retain some equity component. So, park that up for now.

Matthew Gordon talks to Peter Secker, 15th July 2020

Bacanora Lithium's main focus is on monetising the Sonora Project. It has a large, scalable and high-grade lithium resource with a Measured & Indicated Resource of over 5Mt Lithium-Carbonate Equivalent (LCE). Sonora will be developed through a phased approach. Phase one entails the early-stage development phase of the mine and processing plant. Once Sonora is up and running, Bacanora Lithium intends to produce LCE for sale through offtake partners, with additional production eventually being sold on the open market.

The Sonora Feasibility Study was completed in January 2018, with some encouraging headline stats:

1. Pre-Tax NPV of US$1.25 billion, Post-tax NPV8of $802M
2. Pre-tax IRR of 26%, post-tax IRR 21.2%
3. Operating Cost of c. US$4,000/t LCE (for the next "300 years")

These are good numbers for a lithium project, but there is very little capital currently being allocated to new lithium projects, with already developed projects being preferred. Bacanora Lithium needs a US$400M CAPEX. Secker tells us that Red Kite will provide a $150M debt facility and Gengfeng 22.5% in project and 30% in equity. Does that mean 3/4 is financed? Bacanora possesses 10 licences covering nearly 100,000 ha in Sonora, Mexico. 7 of the licenses were covered in the Feasibility Study.

Bacanora Lithium has been operating a pilot plant, located in Hermosillo, to provide proof of concept and technical control. Over the last 4 years of test work, it has been proven to produce battery-grade (>99.5%) LCE.

The simple reality for Bacanora Lithium is that the share price has been on a downslope for the majority of the last 2.5 years. The depressed lithium market certainly hasn't helped matters. Secker states that lithium is a "long-term strategy," which is all well and good, but it does little to comfort long-suffering shareholders in the here and now. I'm not sure I heard what he is going to do about it.

The fundamentals of the Sonora Lithium Project are undeniably positive, but the market isn't receptive to the story yet. Secker says that will come when the company gets the finances in place and commences construction. Money for new lithium projects is hard to come by right now, and with Sonora having a CAPEX of c. US$400M, Secker needs to secure the financing on reasonable terms. With institutions like Red Kite throwing its money into the ring, there is clearly some institutional interest in a low-cost project of this scale, even if the EV revolution/battery metals thematic has taken a temporary demand whack because of COVID-19.

So, c. 75% of Sonora's funding does indeed appear to be in place. M&G is sitting at 20%, with several other institutions in the mix. M&G has stated it will always follow its money according to Secker. Expect to hear an FID in Q1/21. The permitting is done, and he thinks that in 5-months' time, everything else will be done too. The construction period should be just under 2 years, with production commencing in 2023. Could the next few months throw up some significant catalyst moments? Lithium investors will be hoping so; their portfolios have already taken enough of a hit in recent times. Will the value proposition be significantly crystallised and enhanced in 5 months? Watch this space.

What did you make of Peter Secker and Bacanora Lithium?

Company Website: https://www.bacanoralithium.com/