VSA Morning Miner, 20/05/19

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Bacanora Lithium (LON:BCN)

Bacanora Lithium (BCN LN) has announced a proposed strategic investment by Ganfeng Lithium, China’s largest lithium producer and the third largest globally. The transaction includes investment at the project and corporate level for a total value of £21.96m (US$27.8m) at an equivalent price of 25p/sh, in line with the recent share price. This investment by one of the industry majors confirms our view of the attractive economic and technical potential of the project as well as highlighting the ongoing need for the majors to secure additional production capacity given the strong demand backdrop.

The corporate level investment of £14.4m for 57.6m shares at 25p/sh. also gives Ganfeng the right to a Board position as well as pre-emption rights on new equity issuance. The project level investment into a subsidiary of BCN gives Ganfeng the right to acquire 22.5% of the project for £7.56m (equivalent to a 25p/sh. valuation) and the option to acquire up to 50% within 24 months of the initial investment based on market valuations at the time of exercise. The project level investment also provides the right to appoint a Director to the Board of the project level company.

In addition, Ganfeng on completion of the strategic investment will receive exclusive offtake rights to purchase 50% of all lithium products for stage 1 (100% capacity of 17.5ktpa) as well as an option to increase to 75% of all lithium production at Stage 2 (100% capacity of 35ktpa). All production is to be purchased at market prices.

Our prior valuation assumption had incorporated the potential dilution from strategic funding at 50p/sh. Updating our model to reflect this strategic investment and proposed reduction in BCN’s interest at the project level results in a 13% reduction in our target price to £1.00/sh.

With Ganfeng’s support as a cornerstone investor we believe that BCN is now well placed to secure the remaining project financing. We had previously assumed around US$180m would be required in equity given the existing RK Mining debt facility (US$150m) notwithstanding commitments from other strategics such as Hanwa for US$25m.

Although we remain convinced that the pilot plant in Hermosillo acts as a major derisking factor in the BCN investment case we believe that Ganfeng’s support in the finalisation of the EPC engineering contract, the implementation of the plant design and construction as well as project commissioning should provide investors with significant additional comfort given Ganfeng’s expertise in the sector.

We reiterate our Buy recommendation although reduce our target price to £1.00/sh. to reflect the proposed strategic transaction.




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