Bacanora Lithium Plc

Bacanora Lithium Plc (BCN) is a London-headquartered, AIM-listed lithium development company, which seeks to commercialise the Sonora Lithium Project in Mexico and develop the next major lithium project in the country. The group is one of the few pure-play lithium development groups listed on the London Stock Exchange. A feasibility study of the Sonora Lithium Project confirmed favourable operating costs and positive economics, with an internal rate of return of 26.1% and pre-tax project net present value of $1.253 billion. The operations of the company are differentiated in three segments, namely Mexico, Germany and Head Office.

Recent Development
The company on 28 June 2019 announced the signing of Investment Agreement and Offtake Agreement with Ganfeng Lithium, which would result in Ganfeng acquiring 29.99% of Bacanora and 22.5% of Sonora Lithium Ltd, the holding company for the Sonora Lithium Project. The company on 1 August 2019 announced that the first approval from the Chinese Ministry of Commerce had been received and on 20 August 2019, the group announced that the second approval had been processed by National Development and Reform Commission and received by Ganfeng. Further, the company informed that following a Ganfeng board meeting to be held in the coming weeks, it anticipates that the final approval from the State Administration of Foreign Exchange will be received. Ganfeng Lithium is the third-largest lithium compounds producer in the world and the largest lithium metals producer in terms of production capacity, and the competition of the agreement would form a major part of the financing for an initial lithium carbonate operation at Sonora Project in Mexico.

Financial Highlights (H1 FY 2019, in $m)
As the company continues to strengthen its management and operations teams in preparation to advance into development and construction, general and administrative costs increased by $1.5 million, which resulted in an operating loss of $4.4 million as compared with a loss of $3.2 million in H1 FY 2018. The group incurred finance costs of $2.1 million and the group reported costs related to completion and maintenance of debt financing. Property, plant and equipment rose to $29.2 million at the end of the period from $26.4 million at 30 June 2018, while current liabilities reduced by $6 million due to the settlement of accounts payable. The total net assets of the group declined to $38.9 million at 31 December 2018 ($42.6 million at 30 June 2018), while closing cash balance of the group was $20.5 million at the end of December 2018 ($13.2 million at 30 June 2018).

Share Price Commentary

Daily Chart as at 20-August-19, before the market closed (Source: Thomson Reuters)
 
On 20 August 2019, at the time of writing (before the market closed, GMT 11:20 am), BCN shares were trading at GBX 35.50, up by 9.23 per cent against the previous day closing price. Stock's 52 weeks High and Low is GBX 59.00/GBX 11.55. The company's stock beta was 1.51, reflecting more volatility as compared to the benchmark index. Total outstanding market capitalisation was around £43.79 million.

Conclusion
Due to the outstanding capital requirements to fully fund the project, there is still considerable financing risk as failure to obtain additional financing could cause the company to reduce or delay its proposed operations. There is no assurance that the group will be able to obtain adequate financing in the future, even though it has been successful in the past in obtaining required equity financing and has a substantial committed financing in place. Price of lithium fluctuate widely and are impacted by many factors beyond the control of the company and profitability of the operations is dependent upon the market price of the mineral. Future price declines can have a considerable impact on the business and financial condition of the group and make commercial production uneconomical, which might lead to a reassessment of the feasibility of projects. As the lithium market matures, short term shocks can be expected, like increase in production from other producers or cooling demand in China, which might result in a volatile price of battery-grade lithium carbonate in the market. Amid concerns over demand for lithium overan escalating trade war between the US and China, and reflecting a surge in supply, lithium prices have fallen 12.3 per cent this year, leading to delay in capex in the sector by big players.

Based on the risks faced by the group, we have given a "SELL" recommendation at the current price of GBX 35.50 (as on 20 August 2019, before the market closed). 

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