Bacanora Lithium (LON:BCN)
Bacanora Lithium (LON:BCN) has announced changes to its agreement with Solarworld and specifically the cancellation of options in relation to the Zinnwald JV along with a commitment to funding of €1.35m over the next two years.
BCN and Solarworld each have a 50% interest in the Zinnwald lithium project although until the announced changes in the agreement BCN had an option to acquire the remaining 50% of the project company Deutsche Lithium. This has been cancelled along with Solarworld’s option to buy back BCN’s 50% for €1. Solarworld is in administration currently, however, this announcement eliminates the risk that the call option would be exercised and the clarity is a positive step, in our view. Furthermore, the funding commitment is a positive step which will enable BCN to continue to derisk the project from a technical standpoint.
Our current valuation of Zinnwald attributable to BCN is £49m using a risk factor of 0.5x. This implies 11p/sh. and clearly little is being reflected in the current share price, however, today’s announcement which simplifies the agreement and confirms funding to advance the project indicates that it should be more fairly reflected in BCN’s market valuation.
Further production cuts in Australia and downstream battery shortages have prompted lithium shares to rally in recent weeks with the Global X Lithium & Battery Tech ETF up 16% YTD. News earlier this month that Jaguar will halt production of the I-Pace for a week due to a shortage of batteries is exactly the risk we previously highlighted. It will be an increasingly frequent event if investment in the upstream end of the battery supply chain remains muted pointing to higher prices for battery minerals. In the near term the impact of the Coronavirus will no doubt exacerbate these short term issues given the impact on logistics within China, however, we expect a strong bounceback as the economy normalises at the end of flu season.
We reiterate our Buy recommendation and taret price of 114p/sh.