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Bacanora Minerals Ltd Charging towards construction – Zeus Capital

Bacanora Minerals Ltd (LON:BCN) is advancing a feasibility study of the potential for producing up to 35kt pa of battery-grade lithium carbonate at low cost from its Sonora project in Mexico, one of the world’s largest lithium resources. With first production possible in CY2019, Bacanora is well positioned to service what we believe will remain a tight lithium market in which demand is expanding at over 10% annually driven by the fast-growing market for electric vehicles. But with gross opex of <$3,500/t potentially achievable (versus current battery-grade contract pricing of >$8,000/t), Sonora’s unique soft-rock resource should position it towards brine projects in the lower half of the cost curve, providing a margin of safety in the event the current producer oligopoly expands output and/or the plethora of proposed higher-cost hard-rock projects are built.

  • Lithium market expanding at pace: The company offers equity exposure to the fast-growing lithium market in which demand is rising at over 10% annually. This growth is being driven by expansion of the rechargeable battery market as the world increasingly embraces the use of electric and electric-hybrid vehicles, a pattern which is set to see this sector overtake the already well-established market for handheld rechargeable devices as the major end-user of lithium-ion battery technology (vehicle batteries are much more lithium intensive). Future large-scale energy storage solutions provide further ‘blue-sky’ upside potential.
  • Sonora stands apart from peers: The array of new lithium projects emerging into this demand story has raised fears the market may move from deficit to oversupply in coming years – we doubt all projects will come to fruition for a variety of reasons, not least of which is an inability to compete on a cost basis with the current producer oligopoly, which has potential to expand. In this respect BCN stands apart owing to the unique nature of Sonora, which as a shallow-lying, soft-rock resource should yield significantly lower mining costs than hard-rock peers, but which also benefits from higher grades and potential operational flexibility than many brine resources (traditionally the main primary source of battery-grade supply). We recently visited the project pilot plant, which has been in operation for the past two years, establishing and de-risking the processing route for this new source of commercial lithium production.
  • Compelling valuation: Bacanora Minerals Ltd is trading at a discount to the majority of its junior lithium peers on an EV/t resource and targeted production basis, which in our view is misrepresentative of its superior development potential versus many of these peers. We value the shares at 125p on a sum-of-the-parts NAV basis (assuming a fully-funded, fully-diluted NPV10%of Sonora at a $7,000/t long-term lithium price), and expect a re-rating as Sonora is further de-risked from a funding and construction perspective over the next two years.

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