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Bacanora Minerals Ltd: THE INVESTMENT CASE

Bacanora positions itself in two lithium hot spots

The explorer has just signed an off-take deal at Sonora which will 'significantly de-risk' the lithium project
electric cars charging
INVESTMENT OVERVIEW: BCN The Big Picture
Electric vehicles are driving the demand for lithium and other metals and minerals

Bacanora Minerals Ltd (LON:BCN CVE:BCN) has positioned itself for the expected surge in demand in lithium with assets in two of the current hot spots.

Already the owner of the Sonora deposit in Mexico, the dual-listed group recently agreed to take a 50% stake in the Zinnwald lithium project in Germany with the option to take full ownership within two years.

Mark Hohnen, chairman, said: "Zinnwald is a strategic asset located in close proximity to a thriving market for lithium and energy products.”

WATCH: Off-take deal a "good transaction", says Bacanora boss ...

Sonora remained at the heart of the portfolio said Hohnen, but Zinnwald provided exposure to an exciting new geographic market and adds hard rock mineralisation to the portfolio.

German lithium demand growing rapidly

Zinnwald, in southern Saxony, is currently owned by SolarWorld, the largest solar panel producer in Europe.

The deposit has historically been a producer of lithium carbonate in a belt that also contains tungsten and tin, but it’s the location that has seemingly attracted Bacanora.

German demand for lithium is growing rapidly says Bacanora, as development of electric cars and renewable energy storage builds momentum.

Watch: Bacanora eyes up lithium growth opportunities in Germany with new acquisition

The consideration is €5mln plus a further €5mln contribution towards the cost of completing a feasibility study, which will take 18-24 months.

Bacanora also has a two year option to take full control for a further €30mln.

Broker Numis – which has a target price of 130p against 92p in the market currently – said the feasibility study will include both an evaluation of the potential value of by-product tin and tungsten credits and whether to produce carbonate or hydroxide as a final product.

Bacanora will outsource the exploration work to a German consulting group so that it doesn't distract the company's technical team in Hermosillo.

Hohnen said the project – which has a European standard M&I Resource of 511,000t compared with 4.5Mt at Sonora – will complement Sonora where a feasibility study is on track for completion in 2017 and negotiations are underway for offtake deals with groups in Asia. (More on that below).

Sonora study due this summer

Work to upgrade the resource at the Sonora is well underway.

A near 4,000-metre infill drilling programme has been completed that will be crucial in this regard and 1,870 samples have been collected.

The results thus far have been encouraging.

READ: Broker hails ‘exceptional’ Sonora lithium deposit

WATCH: Zak Mir tips Bacanora to hit £1.30

The resource upgrade is an integral plank to a feasibility study being compiled for Sonora, in the north of the country, which is expected eventually to support a 35,000 tonne a year mine. Initial production will start at half that figure.

Work on this crucial document will include a preliminary reserve model and mine plan.

Bacanora said consultant Ausenco is just over a third of the way through the process engineering for the feasibility study.

This means the initial flow sheet has been finalised, quotes are being sought for larger equipment and machinery and the development and optimisation of the preliminary operating cost models has begun.

At the same time, the expanded pilot plant that has been operating since May last year is producing battery-grade lithium carbonate samples.

Having this saleable material will help when it comes to engaging with potential buyers of Sonora’s output known as off-takers.

Speaking of off-takers…

Bacanora recently signed an off-take deal with Hanwa Co., a leading Japan-based global trading company and one of the larger traders of battery chemicals in the Asian region.

Last year, Hanwa reported net sales of more than ¥1,500bn which gives a feel for the size of the company.

Under the terms of the agreement, Hanwa will take a 10% equity investment in Bacanora which will raise just over £10mln via the placement of just over 12mln shares at 82.5p.

READ MORE: Bacanora signs off-take deal with Japan-based global trading company

READ MORE: Agreement a 'vote of confidence' for Bacanora, says City broker

Hanwa will also sign an off-take agreement for up to 100% of the battery grade lithium carbonate (Li₂CO₃) produced at Bacanora’s Sonora lithium project in Mexico.

Hanwa will pay market prices for between 70% and 100% of the lithium carbonate produced during stage one and has the option to increase the off-take tonnage by up to 100% at Stage 2 production.

"This partnership with one of Japan's leading battery chemical traders is transformational for Bacanora,” said Hohnen.

“It significantly reduces the overall risk profile of the project, validates our production process, and provides us with an excellent platform with which to fund the future development of Sonora.”

Market moving towards firms like Bacanora

The market appears to be moving in the direction of companies such as Bacanora that have projects in development with a significant increase in the price of the mineral.

Demand has been driven by the electric car market with lithium a central element to batteries used the vehicles rolling off the Tesla, Toyota and Nissan production lines.

Asia and electric cars will continue to drive the market for lithium said chief executive Pete Secker, but the potential for storage for renewable energy is what caught its eye in Germany.

IN DEPTH: Miners to get boost as electric vehicles drive demand for lithium, cobalt and nickel

Sonora is scheduled to start production in 2019, by which time an investment will have been made at Zinnweld giving it a potential second revenue stream.

Bacanora said it is currently working with a firm called SignumBox to develop long-term lithium pricing scenarios and supply and demand models.

Rare Earth Minerals (LON:REM) has a 19.12% stake.



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