I don’t use the phrase ‘trade of the decade’ lightly.
But if you’re a regular reader you’ll know that, for me, lithium is exactly that.
As I’ve said before, with the growth in rechargeable lithium batteries, we could have a severe supply crunch on our hands in the coming years. Simple economics tell us that less supply and growing demand means higher prices – so this is a sector I want some serious exposure to.
Lithium has historically come from two sources: brines and hard rock mining. But there is a third, potentially cheaper source – clays.
Here’s where it gets interesting – there are really only two companies in the world in on the lithium clay extraction story.
They’re both early stage lithium explorers/miners: Western Lithium Corp (WLC) based in Nevada, USA; and Bacanora Minerals (AIM:BCN), a Mexican outfit, listed in London.
Both companies aim to extract lithium from clay deposits using technologies that are significantly cheaper than the current industry standard.
And to glance at, they seem quite similar. WLC is valued at $90m, while BCN’s valuation stands at just under $70m.
But all is not as it seems. One of these two companies is seriously undervalued.
Four reasons I’d rather be in Mexico
That company is Bacanora. Its valuation is way out of whack, and given that value always tends to come out in the end, I think there’s a serious opportunity here.
I say that because Bacanora has got four big advantages over Western Lithium. First and foremost, just look at the financial evaluation of the two projects.
1. Bacanora is better on paper
The net present value (NPV) of Western Lithium’s project is in the region of $550m.
Bacanora, on the other hand, has several potential projects. One they’re looking to bring into production next year aims to commercialise boric acid. The NPV of the project is $113, and they expect that to cost less than $8m to bring it into play.
And then there’s all the potential lithium projects. In just one of these (Vedanta), the project’s estimated NPV comes in at $848m.
So there you go, with just a couple of projects (out of what could be many), we already see an estimated billion dollars in value.
So BCN looks better on paper, but paper valuations are useless if you can’t actually bring the projects into commercial production.
And that’s the second reason for choosing BCN.
2. Mexico is a far better place to do mining business
According to Western Lithium’s own chief executive, getting drill licences and permits in the USA takes far too long – we’re talking about one or two years for a licence just to do exploratory drilling; five to nine years to permit a mine.
WL completed its 200 drill programme in 2011, and we’re still waiting for production.
BCN, on the other hand, only just started drilling last year, and things are really moving along at pace!
On top of that, not only is Mexican regulation much quicker, but its long history of mining means the legal system and local by-laws are geared towards helping the industry.
Compulsory land purchase (where a miner requires access rights, for instance) and rights to key things such as water and electricity all serve to grease the wheels.
Go to the USA and it’s quite a different story – environmental issues can prove extremely onerous.
You can have all the favourable laws you want, but without a good management team, you’re still not going to deliver results. And that’s the third reason I really like BCN.
3. Bacanora has the more targeted team
Head honcho Martin Vidal has over 20 years’ experience working in northern Mexico. Most of that time he worked for mining giant Rio Tinto, so this guy has the local contacts that are essential in getting a business up and running.
Now, while I admire WL’s lithium mining efforts in Nevada, the fact is it’s a project that’s been left pretty much undisturbed since Chevron drilled the area for uranium in the 1970s and 1980s. Re-establishing the industry base is clearly taking time.
And the fourth, final reason I like the look of BCN is the all-important ‘metallurgy’ – that is, how you extract the metal from the mined material.
4. Bacanora seems to have found a groundbreaking extraction method
As I’ve said, both WL and BCN aim to extract lithium from local clays.
WL has a patented methodology and they reckon it’ll cost them just shy of $2,000 to produce lithium carbonate. Not bad, when you consider the stuff sells for around $7,000 a ton.
But BCN has an in-house metallurgy team that seems to have found a much better method of extraction. In a recent interview with the Telegraph, chairman Colin Orr-Ewing suggested an extraction cost well below $1,000.
Assuming BCN can commercialise and patent this process, the future business should be extremely exciting.
Bacanora is in another league
Let me make one thing clear – it’s not that I hate Western Lithium!
Quite the opposite, in fact – I think it has a potentially really great business. The figures seem to stack up, and despite the obstacles, they’re hoping to get into production in 2016 – at first producing 13,000 tons of lithium carbonate, increasing production to 26,000 tons by 2018.
But Bacanora’s lithium project comes with far bigger ambitions. The aim is to produce somewhere between 35,000 and 50,000 tons a year, starting in 2017. And they’re hoping to have the boric acid project commercialised next year.
At this stage, it has to be stressed that both WL and BCN will require finance to bring their lithium projects into play. It is by no means a dead cert that either company will achieve their ambitions.
But I expect the market valuation of BCN to overtake WL in short order, and then to keep going!
I’m not alone on this one
And it’s interesting to note that REM has recently been upping its stake in BCN. REM now owns nearly 12% of BCN, compared to only 3% of WL.
Clearly REM’s management feels the same way as I do.
The rest of the market still hasn’t cottoned on. But when they do…