28 Feb 2017 07:00
28 February 2017
Bacanora Minerals Ltd.
("Bacanora" or the "Company")
Interim Results for the six months ended 31 December 2016
Bacanora, the London and Canadian listed (AIM: BCN and TSX-V: BCN) lithium company which is developing the Sonora Lithium Project in northern Mexico, is pleased to provide its unaudited condensed consolidated interim results for the 6 month period ended 31 December 2016. These results were prepared in line with International Financial Reporting Standards, and, unless otherwise specified, amounts are expressed in Canadian dollars ('CAD$').
Highlights
Operational
· Continued progress made with ongoing feasibility study ('FS') at the Company's Sonora lithium project ('Sonora') in Mexico - expected to be completed in late summer 2017
· FS is focused on an operation at Sonora capable of initially delivering 17,500 tonnes per year of battery-grade lithium carbonate (Li2CO3) for the first two years of operations, followed by 35,000 tonnes Li2CO3 pa thereafter
· Successfully completed a 4,000 metre infill drilling programme to upgrade a portion of the current Mineral Resource from the Indicated to Measured category, in conjunction with geotechnical and hydrological drilling for the FS
o Sonora currently has a large Indicated Resource currently comprised of 259 Mt averaging 3,200 ppm Li for 4.5 Mt of lithium carbonate equivalent ('LCE')
o Resource model currently being updated by SRK Exploration Ltd
· Ongoing refinement and optimisation of the lithium carbonate flow sheet developed at the Pilot Plant operations in Hermosillo in line with strategic focus on the larger lithium carbonate supply chain in Asia, rather than the smaller lithium hydroxide market
· The Pilot Plant continues to produce battery grade lithium carbonate samples which are being sent to potential off-takers and customers in Asia
o Discussions with potential off-take partners including site visits are ongoing
· The Company is fully financed through to the completion of the FS
Post Period
· Acquired 50% interest in, and joint operatorship of, the Zinnwald Lithium Project ('Zinnwald') in southern Saxony, Germany from SolarWorld AG ('SolarWorld'), the largest solar panel producer in Europe
· Acquisition is in line with management's vision to become a global lithium operator focused on projects with significant value accretion potential and defined markets at both the product and geographic levels
· Zinnwald, which reportedly produced lithium carbonate in the 1950s, provides Bacanora with a potential entry point into the thriving market for lithium in Germany and Europe, which is being driven by the automotive, renewable energy storage and chemicals industries
· Bacanora will earn 50% of the project in return for a cash consideration of €5 million and the completion of a Feasibility Study which is anticipated to cost approximately €5 million and to take approximately 18-24 months to complete.
o The Company has an option to acquire the outstanding 50% held by SolarWorld within a 24 month period for €30 million
Corporate
· Appointment of Mark Hohnen, Non-Executive Director of the Company, as Chairman of the Board
o James Leahy, interim Non-Executive Chairman, resumed his role as Non-Executive Director of the Company
· Appointment of Ray Hodgkinson, who has substantial public company and natural resource experience, as a Canadian based Non-Executive Director of the Company - Mr Hodgkinson previously served on the Board between 2006 and 2013, prior to Bacanora's AIM listing
· Subsequent to December 31, 2016, the Company issued 200,000 common shares as a result of 200,000 stock options exercised at a price of $0.30 each, for total proceeds of $60,000
Peter Secker, CEO of Bacanora, said, "Bacanora's strategy is to continue to build an international lithium company with a portfolio of projects producing high value lithium products for the electric vehicle and energy storage sectors. The full feasibility study at Sonora is well advanced and on course to be completed in the second half of the year. An infill drilling programme has been completed, the results of which will be included in an updated resource model. Our pilot plant has been running continuously since May 2016 producing battery grade lithium carbonate samples which provides the basis for our ongoing discussions with potential offtake partners. We are pleased with the progress being made and our target remains for production at Sonora to commence in early 2019.
"As we advance Sonora towards production, it is our intention to develop a pipeline of additional lithium projects with a strategic geographical focus. The recent acquisition of 50% of the Zinnwald lithium project in Germany is the next step down this path. Zinnwald provides Bacanora with a potential entry into the important European lithium market which we expect to complement the Company's existing exposure to the large Asian market that Sonora provides. We will continue to provide further updates on our progress, as we look to confirm Sonora's status as the next world class lithium deposit and commence a feasibility study at Zinnwald."
Chairman's Statement
The period saw the commencement of the FS at the Sonora Lithium Project in Mexico and since then significant progress has been made towards its completion. This process has been advanced in tandem with our discussions with potential off-take partners, which are progressing positively. This is my first statement as Chairman of Bacanora and I am pleased to be working with a project that has distinguished itself favourably in terms of grade, scale, and costs in comparison to its peers. With this in mind, we look forward to reiterating the attractive economics of this project via the FS and finalising our offtake discussions for the sale of lithium carbonate to the Asian market.
In terms of corporate strategy, Bacanora is focused on building an international, world class lithium company with assets positioned to benefit from the demand for lithium carbonate in multiple global markets. During the period, we advanced discussions regarding the Zinnwald Project in Germany and this culminated in the recent acquisition of a 50% interest of this prospective project in return for a cash consideration of €5 million and the completion of a feasibility study (which is anticipated to cost approximately €5 million). Zinnwald provides us with an ideal entry point to penetrate the European market for the product, which is used in the energy storage and electric vehicle industry. Zinnwald, which reportedly produced lithium carbonate in the 1950s, is located in a granite hosted Sn/W/Li belt that has been mined historically for tin, tungsten and lithium over the past 300 years.
Although bringing Sonora into production in 2019 remains the Company's main focus, Zinnwald fits neatly with our timetable given that the FS in Germany is expected to take 18-24 months, so allowing the study to be completed almost concurrently with the commencement of the new planned operation start-up in Mexico. In addition, the Company also has an option to acquire the outstanding 50% held by SolarWorld within a 24 month period for €30 million. The Company's focus on the German market is based on the rate of growth of the electric vehicle market in Europe and the significant impact it will have on lithium demand over the next decade. For example, in late 2016 the Daimler/Mercedes Group announced that "their automotive group will invest up to $11 billion into at least 10 new electric vehicles plants by 2025".1 In addition, the VW Group announced their "commitment to launching more than 30 million electric cars by 2025, and achieving annual sales of the zero-emission cars of between two and three million by the same date-equivalent to some 20 to 25 percent of the total unit sales expected at that time".2 The above translates into a potential step up in demand for lithium batteries to power all these vehicles, and Bacanora intends to play its part by becoming a major regional supplier of lithium carbonate.
Regarding the ongoing FS at Sonora, this is focused on commissioning an operation capable of delivering 17,500 tonnes per year of battery-grade Li2CO3 for the first two years, following which it anticipates expanding its operations to 35,000 tonnes Li2CO3 per year. At the beginning of the period, the Company announced that it had appointed world class consultants with significant experience of lithium projects to oversee various elements of the FS. These include:
· Ausenco Engineers to conduct the process engineering
· SRK Consulting Ltd to undertake a Mineral Resource Estimate
· International Mining Consultants to deliver the Mineral Reserve Estimate and mine planning
The FS activities have progressed well. We completed a 4,000 metre drill programme for our resource upgrade and mine planning work and the preliminary reserve model and mine plan, which are being prepared by International Mining Consultants, have progressed to schedule. SRK has now received the drilling data from the July 2016 infill drilling programme and will prepare an updated MRE for the FS. This updated MRE is currently scheduled for calendar Q1, 2017. We have also finalised the initial process flow sheet and are in negotiations with international vendors for larger equipment and machinery. Given the recent instruction to deliver a strategy to optimise Sonora's operating costs and energy requirements due to the continued strengthening in reagent input costs, during the period we announced that the results of the FS will not be published until the summer 2017, as the Company believes it will take longer than originally anticipated to ensure that the optimum energy supply for the kiln is selected. Rising costs are relevant to all Bacanora's peers, but importantly, these are being experienced in tandem with a rise in lithium carbonate pricing. The Company has been working with the SignumBox Group in Santiago to develop long-term lithium pricing scenarios and supply-demand models. The FS is budgeted to cost approximately $7 million and we are fully funded for this.
In terms of our offtake discussions, the expanded Pilot Plant has been operating since May 2016, producing battery grade samples of lithium carbonate for delivery to potential off-takers in Asia and Europe. We are delighted to have hosted several site visits with various interested international lithium trading companies and mining companies during the period. Negotiations in respect to offtake agreements with these potential partners are ongoing and will continue in tandem with the preparation of the FS.
The continuous running of the Pilot Plant has also benefitted the Company in other ways, allowing us to develop and optimise the flow sheet for lithium recoveries and reagent consumption. Some of the specific achievements over the last twelve months are:
· Ore-to-product metallurgical test work on bulk samples taken from trenches on the clay units from the planned mining areas within the 100% owned La Ventana concession is in progress
· Upgrading of concentrate and pre-concentrate front-end processes to optimise lithium recovery
· Hydrometallurgical recoveries have been improved by the addition of gas-fired stationary calcining units for continuous roasting of the lithium concentrate
· Optimisation of gypsum consumption and evaporation and crystallisation parameters
· Increased capacity in the Pregnant Liquor Solution circuits to allow continuous leaching operations
· Installation of additional resin columns in the lithium carbonate recovery circuit for the refining of the product to battery-grade lithium carbonate
In addition to the significant flow sheet development and optimisation being undertaken at the Pilot Plant, all of the flow sheet development is being audited by independent consultants supervised by Ausenco, as part of the ongoing FS process.
The continuous running of the Pilot Plant also means that we have been training employees, of which there are approximately 20 now employed. Training and quality control processes are in full swing to negate risk associated with execution of commissioning and operational phases after construction of the Stage 1, 17,500 tpa plant and to ensure accelerated commissioning schedules in terms of operations and quality control. This is expected to de-risk operations significantly. Over the next 18 months the Company will continue a recruitment campaign of engineers and operators in order to maintain the plant in continuous operation and to gain expertise in those processes that require supervision and monitoring for optimisation and quality control.
Corporate
During the period, we made some changes to the Board. I took the position of Chairman meaning that James Leahy, interim Non-Executive Chairman, resumed his role as Non-Executive Director of the Company. The appointment of Ray Hodgkinson as a Canadian based Non-Executive Director of the Company, replacing Shane Shircliff, was also announced. He has substantial public company and natural resource experience and is very familiar with Bacanora, having been on its board between 2006 and 2013, prior to its AIM listing.
On 23 November 2016, the Company announced that the financing condition in the conditional lithium hydroxide supply agreement, previously announced on 28 August 2015, had not been met under the terms of the agreement. The Company advised that it had extensive discussions with the customer as to the feasibility of securing project specific financing pursuant to the terms and conditions of the agreement, that those discussions have now concluded, and therefore we are discontinuing further efforts to secure project specific financing pursuant to the agreement. This development was in line with Bacanora's strategy to focus on the production of lithium carbonate to service the rapidly growing Asian and European markets for electric vehicles and energy storage.
Financial
The Company is fully financed with approximately $24 million in the bank and is therefore fully funded through to the completion of the Feasibility Study.
In order to meet the Company's planned growth and development activities, the Company budgets to spend an aggregate of approximately $17 million over the next 12 months, with approximately $7 million on the Feasibility Study and related expenditures, and approximately $2 million on Pilot Plant related capital expenditures.
Outlook
Bacanora's activities during the period have been aligned with our commitment to delivering high quality and competitive lithium production projects which are ideally positioned to service growing demand for lithium carbonate globally. Our decision to dig deeper into the implications of the rise in reagent prices despite the delays this would ensue is testament to this. Our recent acquisition in Germany means that we are now an international lithium development company and we will continue to build on this proposition through further appropriate acquisitions which demonstrate the potential for excellence. News will be forthcoming in respect to the commencement of our FS at Zinnwald and in respect to Sonora, we will publish an updated resource, provide an update on our offtake discussions, and of course, publish the FS.
I would like to thank our shareholders, management, employees and advisors for their support during the period and look forward to providing updates in the near term.
Mark Hohnen
27 February 2017
Condensed Consolidated Statements of Financial Position
Unaudited
Expressed in Canadian Dollars
As at | December 31, 2016 | June 30, 2016 |
Assets |
|
|
Current |
|
|
Cash | $ 23,797,353 | $ 28,730,168 |
Other receivables (Note 4a) | 454,892 | 265,342 |
Deferred costs | 147,631 | 102,607 |
Total current assets | 24,399,876 | 29,098,117 |
Non-current assets |
|
|
Property and equipment (Note 6) | 1,966,207 | 2,364,371 |
Exploration and evaluation assets (Note 7) | 23,902,448 | 17,816,713 |
Total non-current assets | 25,868,655 | 20,181,084 |
Total assets | 50,268,531 | 49,279,201 |
Liabilities and Shareholders' Equity |
|
|
Current liabilities |
|
|
Accounts payable and accrued liabilities | 643,626 | 1,041,117 |
Warrant liability (Note 8(b)) | - | 897,323 |
Total current liabilities | 643,626 | 1,938,440 |
Non-current liabilities |
|
|
Deferred tax liability | 135,000 | 135,000 |
Total non-current liabilities | 135,000 | 135,000 |
Total liabilities | 778,626 | 2,073,440 |
Shareholders' Equity |
|
|
Share capital (Note 8) | 61,433,516 | 57,058,924 |
Contributed surplus (Note 8(e)) | 4,910,372 | 3,528,990 |
Foreign currency translation reserve | 1,526,065 | 574,478 |
Deficit | (17,177,857) | (13,150,873) |
Attributed to Shareholders of Bacanora Minerals Ltd. | 50,692,096 | 48,011,519 |
Non-controlling interest | (1,202,191) | (805,758) |
Total shareholders' equity | 49,489,905 | 47,205,761 |
Total Liabilities and Shareholders' Equity | $ 50,268,531 | $ 49,279,201 |
Condensed Consolidated Statements of Comprehensive Loss
Unaudited
Expressed in Canadian Dollars
| Three months ended | Six months ended | ||
| Dec. 31, 2016 | Dec. 31, 2015 | Dec. 31, 2016 | Dec. 31, 2015 |
Revenue |
|
|
|
|
Interest income | $ 23,238 | $ 20,519 | $ 62,238 | $ 44,629 |
Expenses |
|
|
|
|
General and administrative (Note 9) | 1,222,280 | 909,254 | 2,505,369 | 1,432,617 |
Depreciation (Note 6) | 3,136 | 27,369 | 42,831 | 61,379 |
Stock-based compensation (Note 8(f)) | 596,639 | 1,375,332 | 1,381,382 | 1,375,332 |
| 1,822,055 | 2,311,955 | 3,929,582 | 2,869,328 |
Loss before other items | (1,798,817) | (2,291,436) | (3,867,344) | (2,824,699) |
Foreign exchange loss | (457,612) | (175,356) | (1,304,192) | (1,131,733) |
Warrant liability valuation | - | - | 348,964 | - |
Loss | (2,256,429) | (2,466,792) | (4,822,572) | (3,956,432) |
Foreign currency translation adjustment | 1,463,914 | (369,798) | 950,587 | 580,492 |
Total comprehensive loss | (792,515) | $ (2,836,590) | (3,871,985) | $(3,375,940) |
Loss attributable to shareholders of Bacanora Minerals Ltd. | (1,822,078) | (2,391,865) | (4,026,984) | (3,768,138) |
Loss attributable to non-controlling interest | (434,071) | (74,927) | (795,588) | (188,294) |
| (2,256,149) | $ (2,466,792) | (4,822,571) | (3,956,432) |
Total comprehensive loss attributable to shareholders of Bacanora Minerals Ltd. | (358,164) | (2,761,663) | (3,076,397) | (3,187,646) |
Total comprehensive loss attributable to non-controlling interest | (434,071) | (74,927) | (795,588) | (188,294) |
| (792,235) | (2,836,590) | (3,871,985) | (3,375,940) |
Net loss per share (basic and diluted) | $ (0.02) | $ (0.03) | $ (0.05) | $ (0.04) |
Condensed Consolidated Statements of Changes in Shareholders' Equity
Unaudited
Expressed in Canadian Dollars
| Share Capital |
| |||||
Number of Shares | Amount | Contributed Surplus | Accumulated other comprehensive income | Deficit | Non-controlling interest | Total | |
Balance, June 30, 2015 | 84,947,409 | $24,827,911 | $657,254 | $1,695,333 | $(2,855,397) | $(680,281) | $23,644,820 |
Brokered placements | 11,476,944 | 17,461,167 | - | - | - | - | 17,461,167 |
Shares issued on exercise of options | 850,000 | 302,840 | (86,840) | - | - | - | 216,000 |
Stock-based compensation expense | - | - | 1,375,332 | - | - | - | 1,375,332 |
Foreign currency translation adjustment | - | - | - | 576,514 | - | - | 576,515 |
Loss for the period | - | - | - | - | (3,712,049) | (244,383) | (3,956,432) |
Balance, December 31, 2015 | 97,274,353 | $42,591,918 | $1,945,746 | $2,271,847 | $(6,567,446) | (924,664) | $39,317,401 |
Brokered placements | 9,750,000 | 14,228,359 | - | - | - | - | 14,228,359 |
Shares issued on exercise of options | 850,000 | 845,820 | (360,819) | - | - | - | 485,001 |
Share issue costs | - | (915,790) | - | - | - | - | (915,790) |
Stock-based compensation expense | - | - | 1,944,063 | - | - | - | 1,944,063 |
Foreign currency translation adjustment | - | - | - | (1,697,369) | - | - | (1,697,369) |
Loss for the period | - | - | - | - | (6,583,427) | 118,906 | (6,702,333) |
Balance, June 30, 2016 | 107,874,353 | $57,058,924 | $3,528,990 | $574,478 | $(13,150,873) | $(805,758) | $47,205,761 |
Shares issued on exercise of warrants | 2,925,000 | 4,486,570 | - | - | - | - | 4,486,570 |
Share issue costs | - | (111,978) | - | - | - | - | (111,978) |
Stock-based compensation expense | - | - | 1,381,382 | - | - | - | 1,381,382 |
Foreign currency translation adjustment | - | - | - | 950,587 | - | - | 950,587 |
Loss for the period | - | - | - | - | (4,026,984) | (396,433) | (4,423,417) |
Balance, December 31, 2016 | 110,799,353 | $61,433,516 | $4,910,372 | $1,526,065 | $(17,177,857) | $(1,202,191) | $49,489,905 |
See accompanying notes to the condensed consolidated financial statements.
Condensed Consolidated Statements of Cash Flows
Unaudited
Expressed in Canadian Dollars
| Three months ended September 30, | Six months ended | ||
| Dec. 31, 2016 | Dec. 31, 2015 | Dec. 31, 2016 | Dec. 31, 2015 |
Cash provided by (used in) |
|
|
|
|
Operating activities |
|
|
|
|
Net loss | $ (2,256,148) | $ (2,466,792) | $ (4,822,571) | $ (3,956,432) |
Depreciation | 3,136 | 27,369 | 42,831 | 61,379 |
Warrant liability revaluation | - | (369,798) | (348,964) | - |
Unrealized foreign exchange adjustment | - | 1,375,332 | - | 580,492 |
Share based compensation | 596,639 | (1,433,889) | 1,381,382 | 1,375,332 |
| (1,656,373) | (805,609) | (3,747,322) | (1,939,229) |
Changes in non-cash working capital |
|
|
|
|
Other receivables | (135,192) |
| (189,550) |
|
Prepaid | (29,661) |
| (45,026) |
|
Accounts payable and accrued liabilities | (610,707) |
| (725,123) |
|
| (2,431,934) |
| (4,707,021) | (2,475,578) |
Financing activities |
|
|
|
|
Issue of shares, net of expenses | - | 17,461,167 | - | 17,461,167 |
Related party (payments)/advances | - | (139,366) | - | 32,873 |
Options exercise proceeds | - | 156,000 | - | 216,000 |
Warrant exercise proceeds, net of expenses | 3,693,563 | - | 3,739,315 | - |
| 3,693,563 | 17,477,801 | 3,739,315 | 17,710,040 |
Investing activities |
|
|
|
|
Additions to mineral properties (Note 7) | (1,767,083) | (738,187) | (3,749,398) | (2,112,329) |
Additions to property and equipment (Note 6) | (531,044) | 95,980 | (215,711) | 116,843 |
| (2,298,125) | (642,207) | (3,965,109) | (1,995,486) |
Increase in cash position | (1,036,496) | 14,596,096 | (4,932,815) | 13,238,976 |
Cash, beginning of the period | 24,833,849 | 8,633,917 | 28,730,168 | 9,991,037 |
Cash, end of the period | $ 23,797,353 | $ 23,230,013 | $ 23,797,353 | $ 23,230,013 |
1. CORPORATE INFORMATION
Bacanora Minerals Ltd. (the "Company" or "Bacanora") was incorporated under the Business Corporations Act of Alberta on September 29, 2008. The Company is dual listed on the TSX Venture Exchange as a Tier 2 issuer and on the AIM Market of the London Stock Exchange, with its common shares trading under the symbol, "BCN" on both exchanges. The address of the Company is 2204 6 Avenue N.W. Calgary, AB T2N 0W9.
The Company is an exploration stage mining company engaged in the identification, acquisition, exploration and development of mineral properties located in Mexico. The Company has not yet determined whether its mineral properties contain economically recoverable reserves. The recoverability of amounts capitalized is dependent upon the discovery of economically recoverable reserves, securing and maintaining title in the properties and obtaining the necessary financing to complete the exploration and development of these projects and upon attainment of future profitable production. The amounts capitalized as mineral properties represent costs incurred to date, and do not necessarily represent present or future values.
2. BASIS OF PREPARATION
a) Statement of compliance
These condensed consolidated interim financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB") applicable to the preparation of interim financial statements, including IAS 34, Interim Financial Reporting. The condensed consolidated interim financial statements should be read in conjunction with the annual consolidated financial statements for the year ended June 30, 2016, which have been prepared in accordance with IFRS as issued by the IASB.
The Company uses the same accounting policies and methods of computation as in the audited annual consolidated financial statements for the year ended June 30, 2016.
These condensed consolidated interim financial statements were authorized for issue by the Board of Directors on February 27, 2017. The Board of Directors has the power and authority to amend these financial statements after they have been issued.
b) Basis of measurement
These condensed consolidated interim financial statements have been prepared on a historical cost basis, except for certain financial instruments that have been measured at fair value.
These consolidated financial statements are presented in Canadian dollars. The functional currency of the Company is the British pound sterling ("GBP") and US dollar for its subsidiaries. The Company's functional currency previously was the Canadian dollar up until June 30, 2016.
c) New standards and interpretations not yet adopted
A number of new IFRS standards, and amendments to standards and interpretations, are not yet effective for the period ended December 31, 2016, and have not been applied in preparing these condensed consolidated interim financial statements. None of these standards are expected to have a significant effect on the condensed consolidated interim financial statements of the Company.
3. CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS
The preparation of the Company's condensed consolidated interim financial statements in accordance with IFRS requires management to make certain judgments, estimates, and assumptions about recognition and measurement of assets, liabilities, income and expenses. The actual results are likely to differ from these estimates. Information about the significant judgments, estimates, and assumptions that have the most significant effect on the recognition and measurement of assets, liabilities, income and expenses are discussed below.
a) Exploration and evaluation assets
The Company is in the process of exploring its mineral properties and has not yet determined whether the properties contain economically recoverable mineral reserves. The recoverability of carrying values for mineral properties is dependent upon the discovery of economically recoverable mineral reserves, the ability of the Company to obtain the financing necessary to complete exploration and development, and the success of future operations.
The application of the Company's accounting policy for exploration and evaluation assets requires judgment in determining whether it is likely that costs incurred will be recovered through successful exploration and development or sale of the asset under review when assessing impairment. Furthermore, the assessment as to whether economically recoverable reserves exist is itself an estimation process. Estimates and assumptions made may change if new information becomes available. If, after expenditures are capitalized, information becomes available suggesting that the recovery of expenditures is unlikely, the amount capitalized is written off in the statement of comprehensive loss in the period when the new information becomes available. The carrying value of these assets is detailed in Note 7.
b) Title to mineral property interests
Although the Company has taken steps to verify the title to the exploration and evaluation assets in which it has an interest, in accordance with industry practices for the current stage of exploration of such properties, these procedures do not guarantee the Company's title. Title may be subject to unregistered prior agreements or transfers and title may be affected by undetected defects.
c) Rehabilitation provision
Rehabilitation or similar liabilities are estimated based on the Company's interpretation of current regulatory requirements, constructive obligations and are measured at fair value. Fair value is determined based on the net present value of estimated future cash expenditures for the settlement of decommissioning, restoration or similar liabilities that may occur upon decommissioning of the mine. Such estimates are subject to change based on changes in laws and regulations.
d) Functional currency
The Company transacts in multiple currencies. The assessment of the functional currency of each entity within the consolidated group involves the use of judgment in determining the primary economic environment each entity operates in. The Company first considers the currency that mainly influences sales prices for goods and services, and the currency that mainly influences labour, material and other costs of providing goods or services. In determining functional currency the Company also considers the currency from which funds from financing activities are generated, and the currency in which receipts from operating activities are usually retained. When there is a change in functional currency, the Company exercises judgment in determining the date of change.
e) Share-based payments
The Company utilizes the Black-Scholes Option Pricing Model to estimate the fair value of stock options granted to directors, officers and employees. The use of the Black-Scholes Option Pricing Model requires management to make various estimates and assumptions that impact the value assigned to the stock options, including the forecast future volatility of the stock price, the risk-free interest rate, dividend yield and the expected life of the stock options. Any changes in these assumptions could have a material impact on the share-based payment calculation value.
The same estimates are required for transactions with non-employees where the fair value of the goods or services received cannot be reliably determined and for the warrant derivative liability.
f) Income taxes
Income tax expense is recognised in each interim period based on the best estimate of the weighted average annual income tax rate expected for the full financial year. Amounts accrued for income tax expense in one interim period may have to be adjusted in a subsequent interim period of that financial year if the estimate of the annual income tax rate changes.
4. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
This note presents information about the Company's exposure to credit, liquidity and market risks arising from its use of financial instruments and the Company's objectives, policies and processes for measuring and managing such risks.
a) Credit risk
Credit risk arises from the potential that a counter party will fail to perform its obligations. The Company's credit risk relates solely to Input Tax Credits ("ITC") receivables in Canada and Value Added Tax ("VAT") receivables in Mexico. Any changes in management's estimate of the recoverability of the amount due will be recognized in the period of determination and any adjustment may be significant. The carrying amount of other receivables represent the maximum credit exposure.
All of the other receivables represent amounts due from the Canadian and Mexican governments and accordingly the Company believes them to have minimal credit risk. The Company considers all of its other receivables fully collectible, and therefore has not provided an allowance against this balance nor reclassified the balance as a non-current asset.
The Company's cash is held in major Canadian, UK and Mexican banks, and as such the Company is exposed to the risks of those financial institutions. The Board of Directors monitors the exposure to credit risk on an ongoing basis and does not consider such risk significant at this time. The Company considers all of its accounts receivables fully collectible.
b) Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they become due. The Company's approach to managing liquidity risk is to ensure, as far as possible, that it will have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses. Liquidity risk arises primarily from accounts payable and accrued liabilities and commitments, all with maturities of one year or less.
c) Market risk
Market risk is the risk that changes in market prices, such as foreign exchange rates, commodity prices, and interest rates will affect the value of the Company's financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable limits, while maximizing long-term returns.
The Company conducts exploration projects in Mexico. As a result, a portion of the Company's expenditures, accounts receivables, accounts payables and accrued liabilities are denominated in US dollars and Mexican pesos and are therefore subject to fluctuation in exchange rates. As at June 30, 2016, a 5% change in the exchange rate between GBP and US dollar would have an approximate $2,353,000 (2015 - $545,000) change to the Company's total comprehensive loss.
d) Fair values
The carrying value approximates the fair value of the financial instruments due to the short term nature of the instruments.
5. CAPITAL MANAGEMENT
The Company's objectives in managing capital are to safeguard its ability to operate as a going concern while pursuing exploration and development and opportunities for growth through identifying and evaluating potential acquisitions or businesses. The Company defines capital as the Company's shareholders' equity excluding contributed surplus, of $45,781,724 at December 31, 2016 (June 30, 2016 - $44,482,529). The Company sets the amount of capital in proportion to risk and corporate growth objectives. The Company manages its capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. The Company is not subject to any externally imposed capital requirements.
6. PROPERTY AND EQUIPMENT
Cost | Building and equipment | Office furniture and equipment | Computer equipment | Transportation equipment | Total |
| ||||||||||
Balance, June 30, 2015 | $ 2,932,054 | $ 3,147 | $ 11,464 | $ 146,396 | $ 3,093,061 |
| ||||||||||
Additions | 108,777 | - | 17,840 | 59,776 | 186,393 |
| ||||||||||
Foreign exchange | (267,264) | - | (18,765) | (17,909) | (303,938) |
| ||||||||||
Balance, June 30, 2016 | $ 2,773,567 | $ 3,147 | $ 10,539 | $ 188,263 | $ 2,975,516 |
| ||||||||||
Additions | 215,711 | - | - | - | 215,711 |
| ||||||||||
Foreign exchange | (571,044) | - | - | - | (571,044) |
| ||||||||||
Balance, Dec. 31, 2016 | $ 2,418,234 | $ 3,147 | $ 10,539 | $ 188,263 | $ 2,620,183 |
| ||||||||||
Accumulated depreciation | Building and equipment | Office furniture and equipment | Computer equipment | Transportation equipment | Total |
| ||||||||||
Balance, June 30, 2015 | $ 412,036 | $ 3,147 | $ 7,843 | $ 99,232 | $ 522,258 |
| ||||||||||
Additions | 80,591 | - | 2,696 | 5,600 | 88,887 |
| ||||||||||
Balance, June 30, 2016 | $ 492,627 | $ 3,147 | $ 10,539 | $ 104,832 | $ 611,145 |
| ||||||||||
Additions | 42,831 | - | - | - | $ 42,831 |
| ||||||||||
Balance, Dec. 31, 2016 | $ 535,458 | $ 3,147 | $ 10,539 | $ 104,832 | $ 653,976 |
| ||||||||||
Carrying amounts | Building and equipment | Office furniture and equipment | Computer equipment | Transportation equipment | Total | |||||||||||
At June 30, 2016 | $ 2,280,940 | $ - | $ - | $ 83,431 | $ 2,364,371 | |||||||||||
At Dec. 31, 2016 | $ 1,882,776 | $ - | $ - | $ 83,431 | $ 1,966,207 | |||||||||||
7. EXPLORATION AND EVALUATION ASSETS
The Company's mining claims consist of mining concessions located in the State of Sonora, Mexico. The specific descriptions of such properties are as follows:
a) Magdalena Borate property
Originally referred to as San Francisco and El Represo projects, Magdalena Borate project consists of eight concessions, with a total area of 7,105 hectares. The concessions are 100% owned by MSB. The Magdalena property is subject to a 3% gross overriding royalty payable to Minera Santa Margarita S.A. de C.V., a subsidiary of Rio Tinto PLC, and a 3% gross overriding royalty payable to the estate of the late Chairman of the Company on sales of borate produced from this property.
b) Sonora Lithium property
The Sonora Lithium Project consists of ten contiguous mineral concessions. The Company through its wholly-owned Mexican subsidiary, MSB, has a 100% interest in two of these concessions: La Ventana and La Ventana 1, covering 1,820 hectares. Of the remaining concessions, five are owned 100% by Mexilit, El Sauz, El Sauz 1, El Sauz 2, Fleur and Fleur 1 covering 6,334 hectares. Mexilit is owned 70% by Bacanora and 30% by Rare Earth Minerals PLC ("REM").
The remaining three concessions, Buenavista, Megalit and San Gabriel, cover 89,235 hectares, and are subject to a separate agreement between the Company and REM. Under the agreement, Megalit is owned 70% by Bacanora and 30% by REM. As at December 31, 2016, Buenavista and San Gabriel concessions were transferred from MSB to Megalit, while the Megalit concession was in the process of being transferred to Minera Megalit S.A. de C.V..
The Sonora Lithium property is subject to a 3% gross overriding royalty on production from certain concessions within the Sonora Lithium property payable to the estate of the late Chairman of the Company.
The balance of investment in mining claims as of September 30, 2016 and June 30, 2016 corresponds to concession payments to the federal government, and costs of exploration, and consists of the following:
| Magdalena Borate | La Ventana Lithium | Mexilit Lithium | Megalit Lithium | Total |
| |||||
Balance, June 30, 2015 | $ 7,246,158 | $ 1,931,837 | $ 2,091,527 | $ 637,905 | $ 11,907,427 |
Additions | 1,015,692 | 4,505,946 | 1,078,990 | 125,575 | 6,726,203 |
Foreign exchange | (537,109) | (60,295) | (186,935) | (32,578) | (816,917) |
Balance, June 30, 2016 | $ 7,724,741 | $ 6,377,488 | $ 2,983,582 | $ 730,902 | $ 17,816,713 |
Additions | 10,061 | 3,713,930 | 14,302 | 11,105 | 3,749,398 |
Foreign exchange | 794,530 | 1,135,426 | 319,874 | 86,507 | 2,336,337 |
Balance, Dec. 31, 2016 | $ 8,529,332 | $ 11,226,844 | $ 3,317,758 | $ 828,514 | $ 23,902,448 |
8. SHARE CAPITAL
a) Authorized
The authorized share capital of the Company consists of an unlimited number of voting common shares without nominal or par value.
b) Common Shares Issued
| Shares | Amount |
Balance, June 30, 2015 | 84,947,409 | $ 24,827,911 |
Shares issued on exercise of options | 850,000 | 355,410 |
Shares issued in private placement for cash(1) | 11,476,944 | 17,871,564 |
Shares issued on exercise of options | 850,000 | 691,470 |
Shares issued in private placement for cash(2) | 9,750,000 | 14,228,359 |
Share issue costs | - | (915,790) |
Balance, June 30, 2016 | 107,874,353 | $ 57,058,924 |
Shares issued on exercise of warrants | 2,925,000 | 4,486,570 |
Share issue costs | - | (111,978) |
Balance, December 31, 2016 | 110,799,353 | $ 61,433,516 |
(1) On November 13, 2015, the Company completed a private financing of 11,476,944 common shares at a price of $1.56 (£0.77) per share for aggregate gross proceeds of $17,871,564 (£8,837,247). The Company paid commission of $354,280 and other share issue expenses of $56,117. As part of the financing, 1,973,407 common shares were acquired by REM, a company that is a significant shareholder and has a position in the Company's Board of Directors.
(2) On May 20, 2016, the Company completed a private financing that raised approximately $14,681,700 (£7,702,500) via the placing of 9,750,000 units (the "Placing Units") at a price of approximately $1.48 (£0.79) per Placing Unit (the "Placing"). The Company paid commission of $440,500 and other share issue expenses of $64,893. Each Placing Unit is comprised of one new common share of the Company (a "Placing Share") and 0.3 of one common share purchase warrant, with each whole warrant (a "Placing Warrant") being exercisable into one common share at a price of approximately $1.48 (£0.79) at any time subsequent to July 25, 2016, but on or before September 30, 2016. Accordingly, an aggregate of 9,750,000 Placing Shares and 2,925,000 Placing Warrants were issued under this Placing.
The Placing Warrants are denominated in a currency different than the functional currency and are recorded as warrant liability of $453,299, which was measured using the Black-Scholes option pricing model with the following assumptions: risk-free interest rate: 0.39%; expected volatility: 38%; expected life: 4 months; fair value per warrant: $0.15. The fair value of the warrant liability was re-measured as at June 30, 2016 to be $897,323 using the Black-Scholes option pricing model with the following assumptions: risk-free interest rate: 0.25%; expected volatility: 44%; expected life: 3 months; fair value per warrant: $0.31.
c) Stock options
The following tables summarize the activities and status of the Company's stock option plan as at and during the period ended December 31, 2016.
Grant date | Number outstanding at Dec. 31, 2016 | Exercise price | Weighted average remaining contractual life (Years) | Expiry date | Number exercisable at Dec. 31, 2016 |
September 28, 2012 | 50,000 | 0.25 | 1.1 | Sept. 28, 2017 | 50,000 |
September 11, 2013 | 725,000 | 0.30 | 1.8 | Sept. 11, 2018 | 725,000 |
December 2, 2015 | 1,200,000 | 1.58 | 4.0 | Dec. 2, 2020 | 1,200,000 |
January 22, 2016 | 1,000,000 | 1.56(1) | 1.2 | Jan. 22, 2018 | 1,000,000 |
April 27, 2016 | 2,000,000 | 1.94(2) | 2.5 | May 27, 2019 | - |
| 4,975,000 |
|
|
| 2,975,000 |
(1) Exercise price of £0.77 per share
(2) Exercise price of £0.96 per share
d) Warrants
The following tables summarize the activities and status of the Company's warrants as at and during the period ended December 31, 2016.
| Number of warrants | Remaining contractual life (Years) | Expiry date | Weighted Average Exercise price |
Balance, June 30, 2015 | 833,333 | 2.8 | March 26, 2018 | $ 0.45 |
Issued | 2,925,000 | 0.3 | September 30, 2016 | $ 1.51 |
Balance, June 30, 2016 | 3,758,333 | - | - | $ 1.27 |
Exercised | (2,925,000) | - | - | 1.35 |
Balance, December 31, 2016 | 833,333 | 1.4 |
| $ 0.45 |
Grant date | Number outstanding at Dec. 31, 2016 | Exercise price | Weighted average remaining contractual life (Years) | Expiry date | Financing warrants |
March 26, 2013 | 833,333 | $ 0.45 | 2.8 | March 26, 2018 | 833,333 |
December 31, 2016 | 833,333 | - | - | - | 833,333 |
e) Contributed surplus
The following table presents changes in the Company's contributed surplus.
| December 31, 2016 | June 30, 2016 |
Balance, beginning of the period | $ 3,528,990 | $ 657,254 |
Exercise of stock options | - | (405,879) |
Stock-based compensation expense | 1,381,382 | 3,277,615 |
Balance, end of the period | $ 4,910,372 | $ 3,528,990 |
f) Stock-based compensation expense
During the period ended December 31, 2016, the Company recognized $1,381,382 (2015 - $Nil) of stock-based compensation expense for options granted under the Company's stock option plan. The fair value of stock options granted during the period ended December 31, 2016 was estimated on the dates of grant using the Black-Scholes option pricing model with the following weighted average assumptions, risk-free interest rate of 0.73%, expected volatility of 138%, and expected life of 3 years. The fair value of each stock option was $1.21. Expected volatility is based on historical volatility of the Company's stock prices and comparable peers.
g) Per share amounts
Basic loss per share is calculated using the weighted average number of shares of 110,799,353 for the three month period ended December 31, 2016 and 109,336,853 for the six month period ended December 31, 2016 (2015 - 91,347,336 and 88,247,373 respectively). Options and warrants were excluded from the dilution calculation as they were anti-dilutive.
9. GENERAL AND ADMINISTRATIVE EXPENSES
| Three months ended | Six months ended | ||
| Dec. 31, 2016 | Dec. 31, 2015 | Dec. 31, 2016 | Dec. 31, 2015 |
Management fees (Note 14) | $ 209,047 | $ 357,161 | $ 773,363 | $ 587,732 |
Legal and accounting fees | 591,244 | 172,460 | 1,001,401 | 290,144 |
Investor relations | 208,689 | 149,937 | 283,630 | 226,668 |
Office expenses | 56,881 | 151,461 | 181,701 | 188,195 |
Travel and other expenses | 156,419 | 78,235 | 265,274 | 139,878 |
Total | $ 1,222,280 | $ 909,254 | $ 2,505,369 | $ 1,432,617 |
10. SEGMENTED INFORMATION
The Company currently operates in one operating segment, the exploration and development of mineral properties in Mexico. The Company has an office in Calgary, and London but it does not generate any revenues or hold any non-current assets at these locations. Management of the Company makes decisions about allocating resources based on the one operating segment. Summary of the identifiable assets by the operating segment is as follows:
| Exploration and Evaluation Activities | Consolidated | ||
| Dec. 31, 2016 | June 30, 2016 | Dec. 31, 2016 | June 30, 2016 |
Property and equipment | $ 1,966,207 | $ 2,364,371 | $ 1,966,207 | $ 2,364,371 |
Exploration and evaluation assets | $ 23,902,448 | $ 17,816,713 | $ 23,902,448 | $ 17,816,713 |
11. RELATED PARTY TRANSACTIONS
a. Related party expenses
The Company's related parties include directors and officers and companies which have directors in common. Transactions made with related parties are made in the normal course of business and are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties.
During the three and six months ended December 31, 2016, directors and management fees in the amount of $368,014 and $715,636 respectively (2015 - $331,242 and 597,655 respectively) were paid to directors and officers of the Company. All of these costs were recorded as general and administrative. Of the total amount incurred as directors and management fees, $126,877 (June 30, 2016 - $38,075) remains in accounts payables and accrued liabilities on December 31, 2016.
During the three and six months ended December 31, 2016, the Company paid $Nil (2015 - $35,297 and $53,559 respectively) to a daughter of the late Chairman of the Company. These services were incurred in the normal course of operations for office administrative services. As of December 31, 2016, $Nil (June 30, 2016 - $Nil) remains in accounts payables and accrued liabilities.
During the three and six months ended December 31, 2016, the Company paid $270,823 and $528,477 respectively (2015 - $260,533 and $496,074 respectively) to Grupo Ornelas Vidal S.A. de C.V., a consulting firm of which Martin Vidal, director of the Company and president of MSB, is a partner. These services were incurred in the normal course of operations for geological exploration and pilot plant operation. As of December 31, 2016, $104,957 (June 30, 2016 - $77,416) remains in accounts payable and accrued liabilities.
b. Key management personnel compensation
Key management of the Company are directors and officers of the Company and their remuneration includes the following:
| Three months ended | Six months ended | ||
| Dec. 31, 2016 | Dec. 31, 2015 | Dec. 31, 2016 | Dec. 31, 2015 |
Directors' fees: |
|
|
|
|
Colin Orr-Ewing | $ - | $ 34,245 | $ 10,056 | $ 49,245 |
James Leahy | 12,400 | 5,000 | 25,263 | 10,000 |
Shane Shircliff | 2,916 | 4,375 | 6,462 | 8,750 |
Derek Batorowski | - | 4,375 | - | 8,750 |
Kiran Morzaria | 4,375 | 4,294 | 8,749 | 8,044 |
Jamie Straus | 2,916 | - | 2,916 |
|
Ray Hodgkinson | 1,250 | - | -1,250 |
|
Total directors' fees: | $ 23,857 | $ 59,289 | $ 54,696 | $ 84,789 |
Management and consulting fees: |
|
|
|
|
Peter Secker | $ 104,536 | $ 127,583 | $ 211,653 | 255,967 |
Martin Vidal | 75,164 | 63,495 | 133,853 | 125,677 |
Derek Batorowski | 84,017 | 56,875 | 147,142 | 97,222 |
Mark Hohnen | 84,606 | 34,000 | 172,458 | 34,000 |
Total management and consulting fees | $ 348,323 | $ 281,953 | $ 665,106 | $ 512,866 |
Employee's salary: |
|
|
|
|
Cordelia Orr-Ewing | $ - | $ 35,297 | $ - | $ 53,559 |
Total employee's salary | $ - | $ 35,297 | $ - | $ 53,559 |
Total director's, management's, consultant's and employee's salaries and fees | $ 372,180 | $ 404,539 | $ 719,802 | $ 704,773 |
Operational consulting fees: |
|
|
|
|
Groupo Ornelas Vidal S.A. de C.V. | $ 270,823 | $ 260,533 | $ 528,477 | $ 496,074 |
Stock-based compensation | $ 638,837 | $ 577,658 | $ 1,244,113 | $ 577,658 |
12. COMMITMENTS AND CONTINGENCIES
The Company has commitments for lease payments for field offices with no specific expiry dates. The total annual financial commitments resulting from these agreements is $10,735. Additionally, the Company has commitments for lease payments for its UK office in the amount of $49,000 per year until July, 2018.
The properties in Mexico are subject to spending requirements in order to maintain title of the concessions. The capital spending requirement for 2017 is $333,180. The properties are also subject to semi-annual payments to the Mexican government for concession taxes.
13. SUBSEQUENT EVENTS
Subsequent to December 31, 2016, the Company issued 200,000 common shares as a result of 200,000 stock options exercised at a price of $0.30 each, for total proceeds of $60,000.
On February 21, 2017, the Company announced the acquisition of a 50% interest in, and joint operational control of, the Zinnwald Lithium Project ("Zinnwald") in southern Saxony, Germany from SolarWorld AG ("SolarWorld"). The Company will earn 50% of the project in return for a cash consideration of EUR5 million and the completion of a Feasibility Study on Zinnwald, anticipated to cost approximately EUR5 million and to take approximately 18-24 months to complete. The Company also has an option to acquire outstanding 50% held by SolarWorld within a 24 month period for EUR30 million.
Sources
1 See https://ca.finance.yahoo.com/news/daimler-says-sticking-diesel-vehicles-u-144809109--finance.html.
2 See http://www.motorauthority.com/news/1104514_vw-commits-toelectric-cars-by-2025-in-new-strategy.