Bacanora Lithium#: Interim Results Update
Pathway to Construction
Bacanora Lithium (LON:BCN)# released interim results for 2019 which highlight a prudent year in terms of spending given the focus on securing the landmark deal announced with Ganfeng Lithium. The agreement was executed in October 2019 following approval from the relevant Chinese authorities. Given this focus corporate spending was significantly reduced in 2019 with an operating loss of US$3.2m versus US$7.99m in 2018. With the drawdown on the Red Kite facility having commenced interest cost was the primary driver of additional costs resulting in a net loss of US$4.95m versus US$11.1m 2018. However, with the completion of the Ganfeng deal along with a subsequent fundraise of £7.7m in November 2019 the company ended the year with a strong cash position of US$48.9m. With a major strategic partner and strong institutional support the company is well positioned to execute on the full project financing package and commence construction.
Recent data indicated 14% YoY growth in lithium demand in 2019 to 307kt, despite a 10% decline YoY in Chinese EV sales following the removal of subsidies for weaker players. The rise in output, notably of spodumene concentrate meant that lithium prices continued to soften into 2020 with SQM (NYSE:SQM) reporting average pricing of US$9,069/t in Q4 2019 and this has no doubt been exacerbated by the impact of coronavirus. However, with Chinese factories and businesses now returning to work and China the most significant consumer of lithium the market should begin to stabilise over the coming three months. Furthermore, significant cuts and deferrals announced in late 2019 are likely to start having an impact on product availability and a drawdown on inventories. The longer-term outlook remains robust with increasing attention on green policies and battery storage from governments and investors.
Recommendation and Target Price
Down 37% YTD, owing to wider market volatility, the shares now imply an EV of £29m despite a cash position of £37m and net debt of £19m. With China resuming business we anticipate that the disruption will likely only impact Ganfeng’s review of Sonora by circa three months. With an industry leading partner and strong institutional support, BCN is well placed to continue advancing its strategy and the shares are unlikely to persist at near one year lows.
We reiterate our Buy recommendation and target price of 114p/sh.