Article on Bacanora placing21 Jul 2018 01:35
That might seem doubly ambitious, judging by a recent debt fundraising for Bacanora Lithium (BCN), whose Sonora project in northwest Mexico is expected to sit in the lower half of the global lithium carbonate cost curve. At the start of this month, the company signed a $150m senior debt facility with finance house Red Kite, on what were described as competitive terms.
Analysts at Numis disagreed (or were unaware of the market’s definition of competitive). The facility is split into two tranches of Eurobonds: the first a $138m bond with an interest rate of Libor plus 8 per cent, the second a 20-year, zero-interest note which will be repaid with reference to monthly production of lithium at a rate of $160 per tonne produced.
Numis believes the two bonds carry effective interest rates of 12.9 and 22 per cent, respectively, stating that “while it is positive that [Bacanora] has secured this debt, both bonds, and especially the second, come at a higher cost than we had envisaged”.
The perception that this was expensive money may have served to cast doubt on the price at which equity investors are willing to fund the project. This week, backed by $90m of investment commitments from Oman’s sovereign wealth fund and existing shareholder Hanwa, Bacanora launched a $100m book-building exercise designed to “meaningfully progress” the project. However, getting Sonora over the line to phase one production of 17,500 tonnes of lithium carbonate a year will still require a further $120m by April 2019.
It all feels a little messy, not helped by a lack of detail on the placing price. Since the fundraising was announced, the shares slid 20 per cent to an assumed placing price of 65p – around a third off a month high.
Analysts at Liberum suggested the lack of clarity on future dilution reflected the difficulties of securing finance for lithium projects that are “technically difficult, have a recent poor track record of delivery...and whose returns are ultimately a function of lithium pricing where there is huge variation in long-run and short-run forecasts”. And so it proved. Just two days after announcing the placing, Bacanora pulled the plug on the equity raise, citing "current volatility in global commodities markets".*
Still, one can argue that both product and project are vindicated by off-take agreements and the $240m in debt and equity agreed so far. What is less clear is how much of a cut existing retail investors will be asked to take. Then again, the real risk capital is yet to be committed, and a 65p placing would not be a terrible result; Liberum reckons Bacanora’s net present value could be 165p at a long-run lithium price of $14,000 per tonne. Assuming the execution is flawless, lithium bulls still have hope.
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