Bacanora Lithium - a buy at a big discount to the possible cash offer price? Gary Newman writes...

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As many of you will know, I’ve never exactly been a big fan of shares in small AIM listed lithium miners and viewed most as being junk when they were being heavily promoted a few years back when the metal was suddenly in the limelight and any sort of mention of it had private investors scrambling to buy in. Most of those companies turned out to be complete failures and certainly never really generated any serious interest in their licences or ‘assets’, despite all the spreadsheets doing the rounds on social media showing why ‘X’ company should be worth billions and how the City had somehow missed this and hence why it was actually only trading at a market cap of a few million and having to regularly raise cash to even pay directors, albeit nice salaries. There was one though where I saw potential, going right back to 2014 when I covered Bacanora Lithium (BCN) as a speculative buy, and I’ve always maintained that I thought it would actually make it into production – including a couple of years back when it was trading as low as 10p and some were claiming it was finished or about to raise funds at a massive discount even to that level!

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I’ve mentioned it in a few videos as well, including the most recent one that I appeared on with Tom Winnifrith, Chris Bailey and Nigel Somerville where we discussed commodities in general. As well as it being one of my six tips at last summer's MineProphets online event, at a share price of 21p. I became more convinced that it would actually be one of the AIM miners to buck the trend and make it into production when a large Chinese company, Ganfeng Lithium which has a market cap of over £15 billion, not only took an equity stake in Bacanora but also a 50% share in Sonora Lithium (under a two-stage investment option, which it recently exercised the second part of), via which the lithium assets in Mexico are held, and where initial pre-mining work is already underway. Ganfeng, which also had an offtake agreement in place for once mining commenced, also recently subscribed for further shares in Bacanora at 45p to take its stake up to 28.88%, and raising $31 million. But now it looks like Bacanora won’t reach the mining stage... but only because Ganfeng has tabled a possible cash offer at a price of 67.5p, subject to approvals not only from shareholders but also the Chinese government.

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I only very recently bought back in myself at 43p so am not too upset, but can certainly see why investors might be and think that the company is selling out too cheaply, given that it was trading at almost 70p as recently as January and without any hint of a takeover. At that price it only values the Bacanora stake in Sonora Lithium at around £223 million, and obviously people are looking at things such as the feasibility study which shows an NPV of $1.25 billion, and feeling that it should be worth a lot more. That is obviously open to opinion and all depends on a number of factors, including how much of a discount they are allowing for the risk of actually producing, the risk that the mine will produce in line with the plan, the 26% internal rate of return and how that compares to other projects, future commodity prices and all sorts of other things. But the flipside of that is that the company did already have the funding in place for stage one of the development, as well as plenty of further potential upside from additional exploration.

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All of that though is fairly irrelevant, whatever your opinion, as it all comes down to whether enough shareholders go for the offer and decide to accept it, which will really all come down to what the other institutional holders decide, given that between them they hold over 60% of the shares in issue. The offer certainly seems to have got some attention, including from former Conservative Party leader Sir Iain Duncan Smith, who has called for ministers to block it on the basis that China already has control of much of the rare earths around the world. I’m not convinced what impact that will have though, if any, given that the assets are in Mexico and not the UK, and nobody seemed all that bothered by any of this when Ganfang initially invested, took a 50% stake in Sonora Lithium or upped its shareholding in Bacanora! I would be very surprised if that objection carries any real weight or throws any sort of spanner into the works. Some obviously have some doubts though as the shares have already slipped back to around 56p to buy, which I think is crazy when the offer price is 20% above that, and is in cash rather than being some sort of a share deal, although you might have to wait a while. There is of course some risk that the deal won’t go ahead (whether that be something regulatory or as a result of due diligence) and that a firm offer doesn’t come, and if it does, then it could be rejected by shareholders. But even if that was to happen, and given the levels at which this has traded in the past, the fact that Ganfeng was prepared to pay that amount - with many up in arms about it being too cheap, and the only reason the II holders will reject the offer is if they take that same view and expect to get more - must at least set some sort of benchmark as to the value here. I recently added some more, though should the share price move up to within a penny or two of the offer price I would look to cash in.

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