Liberum Capital has reiterated its ‘buy’ recommendation for Bacanora Minerals Ltd (LON:BCN,CVE:BCN), despite a sharp increase in projected capital costs for the Sonora project.
The company released a definitive feasibility study (DFS) for the Sonora lithium project last week that outlined a 92% increase in capital costs and a 16% increase in operating costs versus Liberum’s previous estimates for the project, which were based on the original pre-feasibility study by Ausenco from April 2016.
Although the increases are lumpy and mean that the Mexican lithium project is now the most capitally intensive project in the industry (based on published feasibility studies), its operating expenditure (opex) “remains comparable with brines and sharply below the marginal cost of hard-rock supply”, Liberum said.
Running the new higher opex and capex numbers through its model alongside an US$11,000 a tonne long-run lithium price reduces Liberum’s estimate of net present value per share on an 8% weighted average cost of capital to 172p from 185p; based on this, its target price for Bacanora is trimmed to 120p from 130p, which is still about 15p above the current share price.
On a post by-product credit basis, Bacanora's DFS opex of US$3,175 per tonne is at the higher end of other feasibility stage brine projects, but comfortably below all in hard rock costs, the broker added.
“The cost of incremental hard rock supply is of crucial importance going forward. Hard rock supply represents two-thirds of currently financed lithium expansions to 2020 (in LCE [lithium carbon equivalent] terms) and if demand undershoots our expectation, will become the long-run price setter,” Liberum’s mining team said.
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The broker has increased its long-run pricing estimate to US$11,000/t LCE from US$8,000/t LCE to reflect incentive pricing – i.e. subsidies to attract new equity to finance lithium projects - rather than the marginal cost for lithium.
It expects spot prices in 2018 to ease back from the current US$21,000/tonne LCE as spodumene – a source of lithium – concentrate supply ramps up quickly and conversion capacity picks up the slack, but Liberum also expects demand to grow by 15-22% over the next five years, and generally remains bullish on lithium prices.
“In the absence of pricing not maintaining above $11k/tonne we would expect limited further capital investment in the space, as all major brine feasibility studies released this year require this price to deliver a return deemed sufficient to attract equity capital. Even if growth forecasts substantially miss our estimates, any slowdown in capital investment in the sector would quickly result in shortage,” the broker argued.
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Liberum rates Bacanora shares as a ‘buy’.