We’ve just seen the biggest ever lithium deal – what’s next?

I said I’d keep you updated about the seriously exciting lithium story I’ve been covering recently – and today I’ve got some news that shows just how hot this metal is right now.

If you’re not familiar with lithium, you can quickly catch up here, here and here. Essentially it’s a metal needed in all sorts of things from electric cars to smartphone batteries, and demand is rocketing.

And yesterday we saw a serious development – the announcement of the largest ever lithium deal.

Chemicals company Albemarle Corp is taking over the world’s biggest lithium products producer, Rockwood, for serious money – $6.2bn in cash and stock.

So what’s this got to do with us?

Well, a few weeks ago I talked about a company called Rare Earth Minerals (AIM:REM) which, together with joint venture partner Bacanora Minerals, has serious exposure to lithium projects in Sonora, Mexico. If you bought the stock back then, you could already be sitting on profits nudging 200%!

That’s how hot this story is. That’s why I’m asking myself: does the Sonora project have a chance of turning into the next multibillion dollar, Rockwood-style deal?

Let’s find out.

When billion-dollar assets don’t matter

When I look at the lithium projects in Sonora it feels as if every drill that goes in finds more and more deposits.

They’ve only been drilling for about a year, but REM’s chairman, David Lenigas, already estimates a resource of some $26bn in the ground. Yes, that’s billions!

Yet if you put the valuations of the two companies together, you end up with something barely over £125m! And frankly, when I first brought this opportunity to reader’s attention, the value of the combined stocks was less than half that.

But there’s a big difference between the value of a resource in the ground and the value of the business in the here and now. In fact, a miner is only ever worth a fraction of the projected value of its projects.

So just because the resource value is in its billions, you and I shouldn’t get carried away with talk of billion-dollar company valuations too. Unfortunately, judging by the over-hyped debate on the bulletin boards, that’s exactly what some investors are doing.

Bacanora can drill and drill to its heart’s content, it can prove hundreds of billions of dollars’ worth of potential assets,but the fact is, none of this matters while the projects aren’t operational.

You and I need to ask ourselves a few key questions about these sorts of projects:

Is there finance to bring the operation to reality? Is there local infrastructure like road, rail, water and energy? Can you process the raw products to a marketable quality at an economic price?

These questions are the only way to determine whether or not a project could really take off. Let’s look at the Sonora mine and answer them.

Sonora is still grossly undervalued

Though at first sight the market valuation of the Sonora project (ie, the combined value of REM and Bacanora, the £125m figure I mentioned a moment ago) looks ridiculously cheap, if you compare it to other publicly-quoted lithium plays, you’ll actually find that it’s not.

However, when I run you through the following six reasons, I think you’ll agree that Sonora is still grossly undervalued.

First and foremost, this project is sourcing lithium from clays. Most competitors are sourcing the metal from brines, or rock. The clay formations in Sonora are cheap and quick to mine. The going rate for lithium carbonate is about $7,000 a ton – and we’re talking about extracting it for less than $2,000 a ton. Most competitors face much higher costs of extraction.

Second, mining clay is likely to produce valuable by-products. Other minerals may well emerge, maybe even precious metals! Things like drilling mud, for use in the oil industry, provide ‘credits’ that bring up the overall profitability of the primary product.

Third, not only is mining clay cheaper, it’s also much quicker. Just imagine how long it takes to dry off brines from inland lakes in order to capture the valuable compounds. Now imagine how long it takes to scoop the stuff off the ground and refine it. The speed with which you can bring resources to market is absolutely key for the growing battery industry. Scalable supply is a valuable commodity in itself.

Fourth, Sonora has local infrastructure, it has a strong pedigree of mining and, more recently, even car manufacturing. It’s also only 150 miles from the US border. This is no remote outpost – and that’s valuable too.

Fifth, from the initial drill samples, Bacanora has already created what’s known as battery-grade lithium carbonate. When it comes to lithium-ion batteries, you need a much purer form of lithium than for other industrial uses. Not only is battery grade dearer, it’s also where the growing demand is coming from.

Sixth, Bacanora is currently working on a borates project in Sonora too. The idea is to get this project up and running as soon as possible. Bringing the borate mine into production should not only provide profit (again, on paper, the project shows fantastic profitability), but it’ll also prove Bacanora’s credentials as an operator – not just explorer. This should give much needed credibility as the business moves on to secure finance for its bigger projects down the line.

So could this project be the next big thing? Are multi-billion dollar deals on the horizon?

What’s the verdict?

I can see why the market is starting to wake up to the delights of Sonora. I can also see why these projects should be valued at less of a discount to its assets than competitors.

But there’s a very good argument to suggest that both business are still way undervalued.

However, we should not get so excited as to expect multi-billion pound, Rockwood-style valuations any time soon.

Sonora is still an early-stage project. There’s an awful lot that can yet go wrong. And even if successful, financing the operation is likely to dilute shareholder ownership.

Only time will tell, but in the meantime here’s looking forward to 25 July – that’s when Bacanora finally makes its London stock market debut.

I’ll provide an update nearer the time.

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  • gflight

    Wondering why REM has crashed, price dropped 50% in last two
    days. Should I have traded it instead of waiting for a comment from you?

  • Conduitbill

    Hi Bengt

    I read your first Newletter on REM and decided to have a punt…since then the share price has continued to rise.. I was up 254% last week! It has since fell back a ways which is not unusual.If the fundamentals are right then I think it could be a winner. Thanks for the heads-up Bengt!!!

  • jbyork

    Thanks for your advice about REM.
    A question:
    How will the forthcoming AIM listing of Bacanora effect the REM value?

  • idorch

    sold half of my holding in rem when it doubled in price leaving the rest in for the long run so thanks for that Bengt but what happened to the update for bacanora minerals. Hoped to invest but for first couple of hours couldn’t even find it on brokers website and when I did it had shot up. Is it too late to get in now as worried share price will have a heavy pullback. Thanks


    Not strictly on topic but very closely related.Lithium is important for batteries as we know but any thoughts on spherical graphite also needed and apparently very much in short supply

  • Thomas Scrase

    I am pretty certain that Buffett has previously bought businesses to run for cash whilst selling off unwanted bits. Everything has a price, even a dog! I don’t think he will come to any harm with this investment.

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