In this morning’s Bacanora Minerals Ltd (LON:BCN) progress update on its Sonora soft-rock lithium development in Mexico, Bacanora reported that cost estimation work is nearing completion, reiterating that opex is likely be below the level typical of hard-rock deposits that are the focus of the majority of its project-developer peers. The company also revealed that the definitive feasibility study (DFS) is now focusing on a sodium-sulphate roasting route in the processing circuit, in preference to the more expensive gypsum-roast route that had been contemplated previously. We believe this should help limit cost inflation over the estimates published in last year’s prefeasibility study (though some inflation is in our view inevitable), but it is presumably one of the reasons for the DFS overrunning – Bacanora is now targeting completion “by the end of the year”, versus previous guidance of Summer 2017 (and original guidance of Q1 2017). But the delay does not appear to be holding up financing arrangements – discussions are underway with long-term debt providers, including in Japan where they are being facilitated by the company’s strategic offtake partner Hanwa Co Ltd. We therefore continue to believe Sonora will be one of the first new lithium operations off the rank, capitalizing on market tightness which continues to push lithium prices higher.
Sonora DFS progress update: Opex and capex cost estimation work is nearing completion, with the former expected to come in lower than the levels typical of hard rock deposits (owing to lower mining and crushing costs as a soft-rock ore body) but higher than the lowest-cost brine producers in Chile (though Sonora should have greater operational flexibility than brine operations). The planned process route is being further optimized, and a sodium-sulphate roasting method (utilising recycled sodium sulphate from elsewhere in the process circuit) has been developed in preference to the more expensive gypsum roast contemplated previously. In other developments, five independent proposals for power supply (gas and electrical) have been received from local energy and pipeline groups (energy costs are a key driver of overall project costs).
Financing discussions advancing: Offtake partner Hanwa continues to facilitate discussions in Japan with potential long-term debt providers, while preliminary discussions have also commenced with other groups for more traditional project financing packages. This should help expedite construction financing on completion of the DFS, which is now targeted by the end of calendar 2017 (later than prior guidance).
Investment view: Bacanora Minerals Ltd shares are trading at just under 0.6x our NAV estimate of 150p. Our NAV is calculated at a long-term lithium carbonate price of $8,000/t, an assumption that is looking increasingly conservative given contract prices have continued to rise on market tightness, and by some estimates may now be as high as c$15,000/t. Regardless, we would expect Bacanora’s shares to upwardly re-rate towards our NAV estimate over the next two years as Sonora is further de-risked through completion of the feasibility study, project funding and construction.
