Bacanora Minerals Ltd Hanwa transaction completes

Zeus Capital

Bacanora Minerals Ltd COM SHS NPV (DI) (LON:BCN) has completed its share placing with Japanese global trading company Hanwa Co Ltd, raising £10.2m gross. This formalises the previously announced off-take agreement under which Hanwa has committed to purchase up to 100% of future lithium carbonate production from Bacanora’s development-stage Sonora project in Mexico. We see this tie up as a significant de-risking event – it not only adds a new strategic investor whom could potentially cornerstone project financing later this year, but it also validates the battery-industry applicability of product from Sonora, which stands to be the first commercially exploited clay-hosted lithium deposit.

Equity placing: Hanwa has subscribed to 12.3m new shares in Bacanora at 82.5p, for gross proceeds to Bacanora of £10.2m. This gives Hanwa an initial 10% interest in Bacanora, with a pre-emptive right to maintain its shareholding at this level. Hanwa has an option to increase its equity stake to 19.9%, and is entitled to nominate a director to Bacanora’s board.

Offtake agreement: Hanwa has agreed to purchase 70-100% of lithium carbonate produced during the first stage of Sonora, which Bacanora envisages having a 17.5kt pa run-rate (with first production targeted for CY2019). Hanwa then has the option to increase its off-take tonnage to up to 100% of production under the planned second stage expansion of Sonora, which could see lithium carbonate capacity lifted to around 35kt pa two years after stage one. The off-take contract will be tonnage based for battery-grade product, at prevailing market-related pricing.

Forecasts updated: We have updated our forecasts for the equity placing but also to incorporate a 14% increase in our long-term lithium price assumption to $8,000/t (following further tightening of the lithium carbonate market over recent months) and a 10% increase in our opex and capex assumptions (given lithium industry-wide cost inflation). The net result on our earnings estimates is slightly positive, our forecast life-of-mine average EBITDA margin now 52%, from 50% previously.

Investment view: We believe the partnership with Hanwa de-risks Bacanora Minerals Ltd COM SHS NPV (DI) on two fronts: firstly, the off-take agreement confirms Sonora’s battery-grade credentials (Hanwa has market tested sample material from the pilot operation with several of its customers); and secondly, as a strategic cornerstone investor Hanwa could aid the future project financing (it has agreed to help source the debt component via its extensive Asian network). Bacanora’s shares are trading at 0.6x our revised NAV estimate of 150p, which is up 20% on our previous estimate owing to our higher lithium price estimates and assumed equity funding price (the latter in line with recent share price gains – we calculate our NAV on a fully-funded, fully-diluted basis). We would expect this discount to NAV to narrow as Sonora is further de-risked through funding and construction over the next two years.

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