Bacanora Minerals Ltd COM SHS NPV (DI) (LON:BCN) has announced that it is now in advanced discussions with a “significant” Asia-based off-take group for the future supply of battery-grade lithium carbonate from its Sonora project in Mexico. This enhances our confidence that Bacanora will secure definitive off-take agreements ahead of completing Sonora’s feasibility study in summer 2017, a key de-risking event if it is to successfully secure construction funding for the $240m project. Expected completion of the study has slipped slightly (from previous guidance of late Q1 2017), but we do not envisage this delaying off-take negotiations, as potential partners are already in possession of sample product owing to the long-established pilot plant, which has been producing battery-grade lithium carbonate continuously for over six months now. Management has also flagged that the cost of input consumables is rising across the industry –cognizant of industry-wide cost inflation, we had already factored in to our numbers 25% cost inflation vs the prefeasibility study estimate, and therefore do not envisage altering our forecasts or valuation at this time. We still believe Sonora will comfortably fall in the lower half of the industry cost curve, and moreover note that lithium carbonate is currently trading at levels significantly higher than the $7,000/t long-term price assumption used in our valuation.
Off-take discussions progressing: Following delivery of sample battery-grade product from its pilot plant operation in Mexico to a number of potential off-takers earlier this year, Bacanora Minerals Ltd COM SHS NPV (DI) is now in advanced discussions with a “significant” Asia-based group with a view to the future supply of battery-grade lithium carbonate from its Sonora project, in line with management’s long-term marketing strategy.
Feasibility study update: The project feasibility study continues to progress, though management now envisages completion in Summer 2017 rather than end Q1 2017. The delay is due to it taking longer than anticipated to select the optimum energy supply for the kiln in the proposed processing circuit, while management flags that the cost of many reagents required in the processing stage have also been rising across the industry as suppliers struggle to meet rapidly expanding demand (though importantly this is occurring in tandem with strengthening lithium pricing).
Zeus Capital Investment view: We are encouraged by the marketing progress being made, as we view securing long-term off-take agreements as the major de-risking event ahead of arranging project finance. We do anticipate opex rising vs the PFS estimate as a result of industry-wide cost inflation (our NPV-based valuation of 125p already allowed for 25% higher costs), but note this is occurring against a backdrop of rapidly rising lithium pricing, and remain confident Sonora will fall in the lower half of the cost curve, distinguishing it from the majority of its higher-cost developer peers.