When researching the Nemaska Lithium article, I stumbled upon a company that is at least as interesting, as it has a unique and very profitable lithium clay hosted project among others. This company is called Bacanora Minerals (OTC:BCRMF), and its Sonora lithium project which is located in Mexico (listed 48 out of 112 jurisdictions on the 2013 Global Mining Survey by the Fraser Institute, Sonora state isn't that bad compared to for example Guerrero but still no picnic) must have one of the best project economics on anything outside precious metals that I have seen.
Bacanora Minerals; project locations
The Sonora project consists out of several deposits, and the Ventana deposit boasts astounding after tax PEA economics, as the IRR is 84%, and the NPV8 is $848M with an initial capex of just $114M. I will compare these figures with the only, further advanced peer clay project available (Kings Valley of Western Lithium), have a close look at the other projects and the company, and will try to motivate why I think this stock is poised to go up next year, when 2 PFSs are scheduled to be completed.
This company trades in larger daily volumes on its listing in Canada as BCN.V, and much larger on its main board listing in London as BCN.LON, so I would recommend trading by its Canadian or London listing.
All presented tables are own material, unless stated otherwise.
All prices are in USD, unless stated otherwise.
Bacanora Minerals is a Mexican exploration and development company, listed in Canada and London on its main boards, and has two lithium projects in the Sonora State, two borate projects, and a large pilot plant in that same state as well. The company is dividing its attention between all projects, so I will analyze them all later on.
The company has experienced management: some well-known names on resumes are Rio Tinto, Cameco and Canaccord, but also Forte Energy, Westcore Energy and Vatukoula Gold. An interesting detail is the large amount of financing experiences among various members of management and directors, this is something that always opens a few more doors when you need it most. For sure it helped when the company got its second listing on the AIM stock exchange (London listing) on July 25 this year, and collected $7.7M through a brokered financing.
The current cash position of the company is estimated at $13.1M by management, and the company has $0.4M in current liabilities as per September 30, 2014. Management has considerable skin in the game and holds about 12% of outstanding shares, 12% by Rare Earth Minerals and 30% by institutions.
Bacanora Minerals has a current share price of $0.70 and a market cap of $59M, based on 84.37M shares outstanding (88.38M FD):
Share price over 2 year period (chart for Canada listing, in C$)
The share price started to run up in May this year, when the 70%/30% JV with Rare Earth Minerals (REM.AIM) on one of the Sonora lithium projects was announced, and this company also bought over 10% (and some more later on) of Bacanora Minerals soon after. At the end of June this year, after the announcement of the $7.7M financing, the share price really took off, supported by more good news, peaked in August and cooled down afterwards as there were no important developments announced later on. Very recently, the share price went up again as a bullish piece on the company was showcased on a British investment website, and REM published positive results of a surprising scoping study, undertaken without knowledge of majority JV partner (and operating company) Bacanora on the El Sauz/ Fleur lithium clay project.
Since the end of October the TSX-Venture exchange has come down because of soft oil, dragging along everything with it, but also the London listing came down although the AIM didn't drop that much, and London volumes for the company are much larger. This could have been some arbitrage, but I would have expected the larger volumes to be setting the pace here.
The price of lithium carbonate hasn't come down lately by any means, and is projected to rise further due to increasing demand, and supply isn't controlled by one country like China, so from a fundamental point of view, Bacanora seems to be in a favorable position regarding resources.
3. Lithium & Borate
Lithium (chemical symbol: Li) is the lightest of all metals. It does not occur as a pure element in nature, but is contained within stable minerals in a range of hard rock types or in solution in brine bodies within salt lakes, in sea water or geothermal brines. A third source, hectorite clays, has been identified by Bacanora Minerals and Western Lithium in the Americas. However, production methods have not been proven commercially yet, although Western Lithium has completed a PFS on its Kings Valley clay project in May this year, and is very close to demonstrate commercial production levels on its demonstration plant, so it seems a third economically viable source can be expected soon. The contained concentration of lithium is generally low and there are only a limited number of known resources where lithium can be economically extracted.
Lithium can be processed to form a variety of different chemicals depending on its end use. According to Roskill Information Services, lithium carbonate represents approximately 48% of the total global consumption of lithium chemicals (25% technical-grade lithium carbonate and 23% battery-grade lithium carbonate).
The next most common chemical is lithium hydroxide which represents 16% of total global consumption. Other forms of lithium consumed include lithium bromide, lithium chloride and lithium minerals.
Lithium and its chemical compounds exhibit a broad range of beneficial properties, including:
- the highest electrochemical potential of all metals,
- an extremely high co-efficient of thermal expansion,
- fluxing and catalytic characteristics, and
- acting as a viscosity modifier in melts.
As a result of these properties, lithium is used in numerous applications including ceramics and glass, batteries, greases, aluminum, air treatment and others.
Future demand is projected by Roskill to grow at an annual base rate of 9.7% until 2017 with optimistic forecast at 15.7% annual consumption growth. Consumption of lithium in volume terms with be largely driven by the rechargeable battery market which is predicted to grow 21.5% annually.
Lithium-ion batteries have become the most important storage technology in the areas of portable and mobile applications (e.g. laptops, cell phones, smartphones, tablets, power tools, medical devices electric bicycles, electric cars) since around 2000. Lithium's high electrochemical potential - it has the highest electric output per unit weight of any battery material - makes it the standard material for lithium-ion (high energy-density rechargeable) batteries. While portable consumer goods alone continue to provide impressive growth in demand for lithium batteries, the start of mass production of hybrid, plug-in hybrid and electric vehicles presents the most significant upside growth potential for lithium demand.
Lithium supply/demand scenarios according to Credit Suisse
There is no exchange traded market for lithium chemicals, as prices are set by negotiation between producers and customers often based on customer-specific formulations. Prices for lithium concentrates used for conversion into chemicals are correlated to, and tend to follow the same trend as, lithium carbonate prices.
Although prices vary by product and contract, SignumBox estimates the average Lithium prices from January 2012 until December 2013 as below:
The company is focused on lithium carbonate production, and most of the new lithium production coming online is focused on carbonate as well (brine production). Lithium supply and demand had been forecasted for years as being extremely unhealthy with a lot of new supply coming online, presumably destroying prices for many years as demand would stall at the same time. Although this story was still anticipated more or less in 2013 by research firms like SignumBox, having carbonate oversupply exerting downward pressure on prices, the opposite happened, and the current price for lithium carbonate sits at $6200/tonne. Further upside potential for demand could result in much higher future prices according to Signumbox:
SignumBOX forecasts 2013
Demand increased over the last few years because of general battery demand (not just cars), and a lot of new supply appears to be delayed, causing shortages and rising lithium prices.
Ventana's projected PEA costs for lithium carbonate are $1958/t, which would make Bacanora one of the lowest cost producers globally:
Costs of production of lithium carbonate equivalent (LCE) per tonne vs amounts
Note that RB Energy (former Canada Lithium) recently filed for bankruptcy.
When comparing various average costs in the industry for the different types of producers, this table is generated:
Borates are a group of boron-bearing minerals containing boric oxide or B2O3. The common commercially valuable varieties are the minerals called Colemanite, Ulexite, Kernite and Tincal (or Borax).
Borates are the primary source and feed stock for commercial boron compounds.
Boron compounds have a number of unique, highly technical, energy saving uses for which substitution with other compounds is difficult. Some of the applications for borates are:
- Glasses, heat-resistant (including fiberglass insulation & textile)
Boron also reduces the energy used to produce glass.
- Detergents, soaps & personal care products;
- Ceramics, glazes;
- Agricultural micronutrients;
- Other uses (e.g. in control rod alloys in nuclear reactors to bleed off excess energy).
The primary boron compounds that are marketed to commercial consumers are colemanite and boric acid. Boric acid is produced from colemanite and it is the principal feedstock used to produce other boron compounds.
Pricing for colemanite and boric acid is typically on a contract basis between producers and consumers. There is price information available from various sources (US Bureau of Mines, Roskill) that relates to current contract pricing.
Most recent price information places chemical grade boric acid at around $700/tonne.
Colemanite prices vary from $200/tonne for "lump" colemanite from Turkey (this country dominates world production) to $350 for 80% colemanite concentrates.
Bacanora's strategy will be to initially produce a marketable colemanite concentrate, then if conditions permit, upgrade its facilities to produce a chemical grade boric acid derived from its colemanite.
Bacanora Minerals has five projects as briefly mentioned:
- Its flagship La Ventana lithium clay project
- the early stage El Sauz/ Fleur lithium clay project
- the El Cajon borate project
- the Tubutama borate project
- the Hermosillo pilot plant (boric acid, sourced from El Cajon)
Its flagship La Ventana lithium clay project is in PEA stage (completed January last year), the nearby, more early stage El Sauz/Fleur project has a NI43-101 resource estimate, and the much smaller El Cajon borate project is also in PEA stage (also completed in January 2013). The Tubutama borate project is an early stage exploration project and is shelved for now. The Hermosillo pilot plant is actually part of the El Cajon project, and is used to gain in-house knowledge of further product grade enhancement, and provide further test work. The object of this test work will be to produce colemanite samples for potential consumers, in order to establish a market and pricing for El Cajon colemanite, as well as data needed to move the project forward to the feasibility stage for larger borate mining and production facilities.
As the company is focused on flagship project Ventana and El Cajon for early cash flows, and El Sauz/Fleur could provide a nice expansion opportunity for Ventana, I will concentrate on those three projects.
A. El Cajon borate project
Situated in the state of Sonora, Northern Mexico, the Magdalena Borate Project consists of two concession blocks covering a total of 15,508 hectares. The concessions are 100% owned by Bacanora, subject to a 3% royalty to a Rio Tinto subsidiary and a 3% royalty to CEO Colin Orr-Ewing. The property is road accessible located 17 kilometers east of the town of Magdalena de Kino and has excellent rail or truck access from that centre both to local markets for borate or to overseas markets from the port at Guaymas.
Bacanora Minerals; borate concessions
The primary boron mineral of interest is colemanite (Ca2B6O11.5H2O), which contains up to 50.8% borate (B2O3).
El Cajon NI43-101; resource estimate 3 zones
The average grade isn't spectacular, for example competitor Orocobre with its Argentinean projects has an average grade (partly historic resource estimate, is currently updated to industry standards) of 19.5% (and almost triple the tonnage of B2O3). Nevertheless, Bacanora completed a decent PEA on a 4500tpd open pit operation on January 4, 2013 with the following after tax results for a $500/t base case:
The very limited capex ($1611/tpd) was a surprise for me although I knew nothing about borate operations before. The real cash is made by concentrating the colemanite, although the processing plant costs only $2.75M (could be expanded some more by additional recovery enhancing units). The company aims at completing a Pre Feasibility Study (PFS) for El Cajon in Q1, 2015.
B. Ventana lithium project
The flagship Ventana lithium project is part of the Sonora lithium project, and is also located in Sonora State, Northern Mexico, situated 180 km northeast of Hermosillo. The Sonora project area consists of five concession blocks; Buena Vista, San Gabriel, Ventana, Fleur and El Sauz. The most southern four concessions compose a total of 5,786 contiguous hectares, and there is road access to the concessions.
The Ventana concession boasts a large indicated lithium resource:
The average lithium grade is low compared to hard rock (mineral) lithium deposits, and stands at 0.3% (see 3,000ppm in the table, the multiplying factor for lithium to lithium carbonate equivalent is 5.329 times) but this seems to be more or less average for clay deposits, as Western Lithium, the only other American clay hosted lithium explorer, has an average grade of 0.395%. Whereas Western Lithium uses conventional recovery methods in its Pre Feasibility Study of May 2014 and records an after tax IRR of only 20%, Bacanora completed a PEA in January 2013 with a staggering pre tax IRR of 138%:
As the NPV8 figure is after tax, one would assume the IRR is also after tax, but this figure is before tax. After tax it comes in around 84%.
This difference in IRR between the two companies is achieved by using a new roasting method for extracting the lithium from the clays. This method has only been tested in a laboratory environment and not on a commercial scale, so metallurgy seems the big question mark here until proven otherwise. But the first results are very encouraging.
Western Lithium has developed another, more conventional method, requiring more initial capex ($248M, in 4 years another $161M funded from internal cash flow), starting at a lower production capacity of 13,000 tpa LCE and taking a lot of byproducts into account (potassium and sodium), resulting in a much smaller NPV8 of $373M. Notwithstanding the very low cash cost of $968/t LCE net of by products. Before by products, costs stand at $3500/t LCE, which is nothing special compared to the majority of current world production by brines (on average about $2300/t LCE). Western Lithium is much more advanced regarding pilot plant testing its recovery method, so although less profitable it is far more derisked, as Bacanora still has a long way to go here.
Ventana deposit; clay units
C. El Sauz/Fleur lithium project
In addition of the Ventana project, Bacanora has entered into a 70%/30% joint venture agreement with Rare Earth Minerals to explore and develop the adjacent El Sauz/Fleur concessions. A 10 hole diamond drilling program on El Sauz/Fleur was initiated in May. Completion of the first three drill holes have confirmed that the clay units on the Ventana lithium deposit continue onto the El Sauz/Fleur concessions and extend the strike length of the sedimentary basin that hosts the lithium-bearing clay units to 6.7 kilometers:
El Sauz concession
El Sauz could prove to be a nice extension of Ventana, and capable of considerably increasing the resources of Ventana, creating a synergistic lithium district altogether. The current resource estimate already indicates a resource at least as large and a slightly higher grade compared to Ventana:
To me it should be fairly obvious that management would be looking for expansion options, although at a later stage, in an attempt to keep initial capex low in this harsh economic environment. Metallurgy and recovery by Bacanora's new roasting method hasn't been proved on an economic scale yet as well, so I assume that the company will continue development on Ventana alone for now.
To my and management's surprise, REM announced impressive results of a El Sauz/Fleur scoping study on December 22, 2014, completely out of the blue. The after tax NPV8 came in at $1124M, IRR at 22.6%, and capex was projected to be a rather high $485M. This is probably an attempt to indicate future value of this project to REM shareholders, but the style and fashion is unknown to me. You don't see JV partners releasing economic studies separately from each other every day, the operating partner not having a clue what's going on. This is very unusual.
Besides this, as Bacanora is fully engaged in discovering metallurgy and recovery methods for the hectorite clay material, which has never been produced commercially before, every assumption or claim made by outside parties must be questioned on validity in this area. Especially when REM didn't co-operate with Bacanora on their study and assumptions. Furthermore, Bacanora is doing whatever it can to keep capex and costs as low as possible on Ventana, so a study combining higher costs and much higher capex on an adjacent property isn't particularly useful to the company I'm afraid. Besides this, the forecasted annual production of 75,600t LCE is so large (45% of current world production) that it could cause an undesired equilibrium shift in LCE pricing. Fortunately El Sauz/Fleur isn't the flagship for Bacanora Minerals, as I can't really appreciate these loose cannon actions.
5. Adding El Sauz/Fleur to Ventana
In a more normal chain of events, it seems more appropriate for Bacanora to add El Sauz/Fleur to the Ventana production later on, when market conditions favor an expansion. This could also result in an estimated doubled LOM production, based on an added 0.7Mt LCE attributable to Bacanora at an average grade of 2.15%, at a cut-off grade of 0.3%. I combined royalties and corporate taxes to 37%.
This in turn would generate the following DCF analysis table for an LOM of 40 years:
The NPV8 increases to $1104M, the corresponding after tax IRR comes in at 85.4%:
The staged scenario with the expansion funded by internal cash flow generates the following table:
The NPV8 increases considerably to $1559M, while the after tax IRR goes down a bit to 83.3%. Generating an after tax cash flow of over $200M when finally in full phase 2 production as a standalone company doesn't make it hard to envision a corresponding market cap by then of at least $1B. Of course the lithium market would have to allow such juggernauts, without lowering lithium prices because of the sudden increase of production. To be slightly more conservative, I would like to stick with the 40 year scenario.
6. Peer comparison/valuation
In order to value Bacanora Minerals, the NAV/marketcap multiplier seems to be the most appropriate metric. For this a peer comparison had to be done based on lithium projects:
Bacanora appears to be multiplied like Nemaska, although this last company is more advanced and can be compared better with peers in the same stage. This is very difficult for Bacanora, as the only company with the same type of clay hosted deposits is Western Lithium, which is more advanced and uses another recovery method. As Western Lithium is more advanced, especially with its proprietary recovery method which is very close to commercial production demonstration, it is much more derisked.
In case of the Ventana base case (NPV8 of $848M), this could mean an estimated NAV/MC multiplier of 10 after the PFS is completed (due in 2015), for an estimated target share price of $1.15, for a profit of 64%. For a 40 year development scenario (NPV8 of $1103M), this would result in an estimated market cap of $111M, for an estimated target share price of $1.32, for a profit of 88%.
Needless to say that this junior could become a multibagger when it succeeds in commencing commercial production, as usual NAV/MC multipliers are at least 1.
The first catalyst coming up is the PFS on the El Cajon borate project, to be expected in Q1, 2015. Somewhere in 2015 the company aims at completing the Ventana lithium project PFS, but can't point towards a quarter yet. A lot of testing needs to be done on a new pilot plant (as the Hermosillo pilot plant is too limited in size for this) in order to prove the possibility of commercial production on this new roasting method, which I consider the biggest risk of Bacanora at the moment. If successful it could provide one of the biggest returns of the industry, if not the lithium projects of Bacanora have no chance of becoming economically viable, and the company has only El Cajon left. After about another two years of successful production and testing by possible off take candidates, and signing off take agreements, the company aims at financing the El Cajon and Ventana projects.
Lithium carbonate prices have a lot of upside, strengthened but not entirely depending on EV developments, as more and more devices around us need high performance batteries. However, companies coming online with new and considerable production like Orocobre could neutralize this upside for some years to come. As the Ventana project has very global targets of commencing production in 2018/2019, there should be time enough for demand to absorb this added production, and provide increased pricing levels for Bacanora in my view.
Bacanora Minerals could be another one of very interesting lithium plays besides Nemaska Lithium, because of its stunning economics for the Ventana project. In my opinion everything depends on the new recovery method which has produced solid results in the laboratorium, but has never been tested on a commercial scale. The company is fully financed through PFS for both El Cajon and Ventana, but Ventana will need a larger pilot plant and this requires another round of financing.
The upcoming PFS of Ventana will be an important milestone, and I expect a rerating by then, as the company has some very interesting and profitable projects, advancing them quietly towards production.
I hope you will find this article interesting and useful, and will have further interest in my upcoming articles on mining. To never miss a thing, please click on the bold link labeled "Follow" above the title at the top of this article to get an email notice of my new articles soon after they are published.
Ventana project; upper clay unit
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I would prefer to wait a little longer than the next 72 hours, to see if the share price could come down some more after the recent spike.