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This UK lithium stock could jump. Here’s why

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Lithium has been a popular investment theme in recent months. Many investors see potential in the growing electric vehicle battery market to drive demand for lithium. That helps explain the renewed interest in UK lithium shares.

One UK lithium share leapt last week. I still think its share price could jump further. But I won’t be buying the shares for my investment portfolio. I explain why below.

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Bacanora Lithium investment case 

Bacanora Lithium (LSE: BCN) is a mining company. Its key asset is its part of a lithium mining development in Sonora, Mexico.

Sonora’s high mineral grade and scaleable nature form part of the project’s appeal. I have previously discussed the company and what I saw as the pros and cons of its investment case.

But the mine is not yet in production. That makes it hard for me as an investor to assess its long-term production potential with confidence. Unless I feel quite confident assessing a company’s long-term prospects, it won’t meet the investment criteria for my portfolio.

Why the Bacanora Lithium share price jumped

The largest shareholder in Bacanora is Chinese lithium giant Ganfeng Lithium. Last week it was announced that Ganfeng may make a bid for the shares of Bacanora it does not own.

The indicative price was 67.5p per share. But in Monday trading these UK lithium shares are around 57p. That suggests that even now there is the chance to generate an 18% return in a matter of months if the Ganfeng bid goes ahead.

No bid yet for these UK lithium shares

A key point to note is that Ganfeng has not actually made a bid yet.

It plans to do so if certain conditions are met. For example, the Chinese company needs to get the right approvals from regulators in its home market. That process could take months.

At the moment there is no particular reason to expect that the bid won’t materialise. After all, Ganfeng already effectively owns almost 30% of Bacanora. Clearly it sees value in the company.

However, that is not a guarantee a bid will emerge. There could be regulatory hurdles, for example. The Bacanora board could reject an approach. So there is a risk that no successful bid will emerge.

Impact for the Bacanora share price

The Bacanora Lithium share price today is around a third higher than it was early last week. But a sizeable gap remains between the current price and prospective bid level.

However, I see risks to buying now in anticipation of a takeover. I think Sonora is an attractive asset due to its projected lithium output and cost basis. But the current share price clearly factors in expectation of a bid. Last week’s jump makes me think the current Bacanora Lithium share price is not solely related to its underlying fundamentals.

What if a bid doesn’t arrive, or is rejected? I think the price of these UK lithium shares could fall again.

My next step for these UK lithium shares

Previously I was waiting to see how the Sonora development proceeded. Until then I felt the Bacanora Lithium share price was too speculative to meet my investment criteria.

The possible bid caught my attention. But it hasn’t shifted me from my original analytical perspective as an investor.

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christopherruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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