The economics of Bacanora Minerals PLC’s (LON:BCN CVE:BCN) Sonora lithium deposit in Mexico are exceptional at current prices reckons broker Liberum, which has a target price of 120p on the AIM-listed explorer.
Recent reports from three of the large producers have pointed to lithium carbonate prices at US$12,000/t, close to double the price two years ago.
At that price, Sonora has “A three year payback and a post-dilution FCF (free cash flow) yield of 80% (US$245mln) once the project is ramped-up in 2022 (assuming US$155mln of equity raised at 70p for both phases)” said the broker.
Sonora, though, is more than two years away from production and first needs to deliver offtake and finance.
Liberum said that producer SQM reported extremely strong growth in contract prices for lithium carbonate.
The majority of lithium volumes are sold in bi-lateral contracts between the major producers SQM, Albemarle, FMC and customers, which the broker says is a much better reflection of true market dynamics than spot prices, which are thinly traded and extremely volatile.
SQM, for example, saw lithium revenues rise by 131% over 2016 on 28% better volumes and an 181% rise in revenues n the fourth quarter or, more simply, prices rose by 80%. Two other producers, FMC and Albemarle's achieved lower prices.
Liberum expects the lithium carbonate market to grow from 196,000t in 2016 to 323,000t in 2020, with 91% of the growth coming from the battery market, but weighed against that are two big projects coming on stream soon at Mt Marion and Mt Cattlin.
“Given the huge wave of spodumene concentrate hitting the market in 2017 prices should correct from current levels, unless ramp-up/production difficulties cause further delays.”
Even so, with processing likely to become more of an issue, by 2020 40,000t LCE per annum will be required just to keep the market in balance and by 2025 75,000t per annum will be required on the broker’s forecasts.