With excitement over electric vehicle shares like Tesla increasing in recent years, attention has recently turned to battery manufacturers. Who will produce the electric batteries for such vehicles? Will these companies be able to profit from explosive demand growth, or will high research costs swamp the chance of turning a profit?
Lithium is a key component of such batteries. A number of UK lithium stocks have seen wild price swings in recent months as investors try to get a piece of possible future growth. This has been a market with dramatic swings, so personally I wouldn’t invest in any UK lithium stocks without investigating them in more detail and learning more about them. One of the UK lithium stocks in the spotlight right now is Bacanora (LSE: BCN).
Bacanora: a mining play among UK lithium stocks
Bacanora offers exposure to future lithium demand through its investment in a large-scale lithium mining project. Called the Sonora project, after its location in Mexico, the mine complex contains a number of drill sites. The company has been working for some years to identify the feasibility and attractiveness of the site.
As is normal with speculative mining developments, it takes time to assess exactly what minerals the mine has, how easy they are to extract and what the project economics would be. Sonora is quite remote, with roads needing to be put in to facilitate even this exploratory work. So things have not moved fast. However, the company has repeatedly said that it targets a 2023 start to production at the site.
Like any mining share focused on a narrow portfolio of assets, whether UK lithium stocks or old school miners, there is plenty of risk. We don’t know yet whether production will turn out to be viable and cost effective. The lithium price could increase as the number of electric vehicles increases, leading demand for batteries. But that could also lead to a glut of lithium projects, leading to the price crashing. While Sonora is the main asset, Bacanora does have a minority holding in some other lithium projects in Europe.
Bacanora isn’t working on its own. The Sonora project is half owned by a Chinese company called Ganfeng Lithium. Ganfeng is a leading lithium company with a wide portfolio of assets. Not only does it own half the Sonora project, it also is the biggest shareholder in Bacanora, with a stake of just over 25%.
Ganfeng has an offtake agreement for the Sonora output once it starts producing. Its active involvement in the project could be a sign that this large lithium company sees real potential in Bacanora. One of the challenges for the Sonora mine to begin commercial production is securing the funds for the project. It was announced this week that Ganfeng has invested another £21.8m in Bacanora, as a result of increasing its stake in the companies’ joint venture at Sonora.
Commercial production is likely two years away at least. No one knows what the lithium market will look like then. However, Bacanora offers exposure to a promising large-scale lithium mine. It’s certainly a share that comes with risks, which mean I won’t be buying for now. But I’ll be keeping an eye on Bacanora and watching for any positive updates on the Sonora development.
christopherruane has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Tesla. 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.