SMALL CAP SHARE IDEAS: Bacanora Lithium

Britain’s recent commitment to switch to electric vehicles ten years earlier than planned underlines how rapidly change is on the way.

In the UK alone, that will mean up to 10.6million electric vehicles by 2030, with that number potentially rising to 36million by 2040 according to National Grid.

Hurdles remain, not least in how all these vehicles will be powered but lithium-based batteries seem certain to be a major part of the solution and companies producing the metal such as Bacanora Lithium stand to be major beneficiaries.

How will we power our electric cars? Lithium-based batteries seem to be a major part of the solution and companies producing the metal such as Bacanora Lithium stand to gain from this

The AIM-listed group is developing the Sonora deposit in Mexico and it reckons it is one of the most prospective lithium projects around anywhere.

Bacanora expects demand for lithium to rise steadily when global usage really starts to hit its stride.

On current predictions that is going to be around 2023 or roughly when the Sonora project starts to come fully into production.

Small companies developing large projects inevitably involves risk, especially on financing, but the company has some big partners and received a major boost in November when Chinese group Ganfeng exercised an option to take its direct stake in Sonora to 50 per cent.

Ganfeng is China’s largest lithium producer and one of the top three in the world. As well as confirming its commitment to fund half of the project, Ganfeng also chipped in additional cash of £21.9million adding a further layer of financial certainty as the project moves towards construction.

Building a new mine anywhere is not cheap and Sonora is no exception. Current forecasts are for the first phase to cost $420million, though this might fall once Ganfeng, which is the contractor, runs through the final calculations.

Bacanora already had $150million committed for its share of the building costs through existing loan agreements.

A feasibility study put a value of $910million on Sonora and with Ganfeng now demonstrating its commitment brokers argue that arranging the finance for the remainder should be that much more straightforward.

VSA, the broker, said that even though Bacanora has a lower direct interest in Sonora, the structure of the project financing is likely to be far more favourable to its shareholders.

Dilution will be lower due to a smaller equity financing at company level, said the broker.

‘We had previously assumed that around $100million would need to be raised as equity at the BCN [Bacanora] level. That now appears to be more like $60million.’

Ganfeng is also a major shareholder in Bacanora and assuming it and other big shareholders, such as M&G and Japanese firm Hanwa, maintain their stakes a big chunk of this is covered already.

Raising the outstanding finance for the mine at Sonora now looks highly achievable, added VSA, especially given the stronger outlook for transitional energy and the strengthening backdrop for lithium where prices have been rising again.

Peter Secker, Bacanora’s chief executive, echoed that sentiment: ‘Their [Ganfeng] investment further de-risks the project and reduces the equity demands on Bacanora’s own shareholders to fund Phase 1 of the project.’

Switch to electric: Up to 10.6million electric vehicles are expected to be in circulation by 2030, with that number potentially rising to 36million by 2040 according to National Grid

The shares reacted positively to the news, which also has a beneficial effect as a higher market value should mean less dilution for existing shareholders.

VSA noted that Ganfeng’s financial position has also strengthened substantially this year while its share price has almost trebled since January to give a market value of around $17billion.

Sonora is not Bacanora’s only project: The company also has an interest in the Zinnwald deposit in Germany, which lies close to the new electric vehicle manufacturing plants of the major German car groups.

However, a restructuring in October saw the stake in Zinnwald injected into fellow AIM-listing company Erris Resources in return for a substantial equity stake and a royalty on any net profits.

As Erris raises additional finance to develop Zinnwald, Bacanora’s stake is likely to fall but the deposit received a value of $428million in a study based on a thirty year mine life, which suggests it will add substantial value as development progresses while also diversifying the one-country risk of just being in Mexico.

True, the lithium story has been around for a while now but with the emphasis now switching to production rather the speculation, Bacanora looks very well placed.

VSA estimates the company is worth 118p per share, which compares to the current share price of 44p and a market value of £103million.

Electric vehicles are going to change a lot of things and Bacanora is a good way to be involved at the ground floor.

This post first appeared on Dailymail.co.uk