Bacanora Minerals (BCN.V) - company appears ahead of schedule to place El Cajon into production

Update by Objective Capital , Aug 09, 2011 download full report
Click for previous reports on this company
Questions? |

Key Points:

• Further price increases for boric acid and colemanite have occurred this year
  Bacanora’s El Cajon project is projected to become a significant producer of colemanite and low capital and operating costs make the project heavily leveraged to prices for the commodity. Recent increases have pushed the current price for 40-percent colemanite concentrate well above US$500 per tonne.

  Although we model the price as reverting toward its long-term, inflationadjusted average of US$300 per tonne over a 12.2-year period, with volatility of 6.5 percent, the low volatility and lengthy time to revert combined with a nominal rate of inflation result in the modelled price remaining near or above US$450 per tonne over the projected life of mine.

  The significant increase in the price of colemanite since our initiation note results in a significant increase in our valuation of the project and of Bacanora.

• Bacanora is engaged in an aggressive exploration and development programme at El Cajon
  The company is currently conducting drilling and metallurgical work at El Cajon; the drilling will be finishing in late August but the metallurgical work will continue up to November. To date, Bacanora has identified it can upgrade its feed from approximately 10 percent to 30 percent through desliming. Management expects its continuing metallurgical work will achieve its target of 42 percent colemanite through flotation.

  Bacanora has two drill rigs on the property and has currently completed approximately one-third of the planned 31 holes. Drilling should be complete by the end of August. The purpose of this infill drilling is to better delineate the deposit and upgrade the resource ahead of the feasibility study of El Cajon, which is expected to be complete by the end of the year.

  Concurrently, Bacanora has hired a Mexican firm to conduct the environmental work leading to the filing of a formal environmental impact assessment late this year. Completing the environmental assessment process is a precondition for Bacanora receiving a mining licence.

• Bacanora has recently completed a C$7.05m financing
  In late June, Bacanora successfully closed a private placement of 14.11 million shares at C$0.50, raising just over C$7m to further its exploration programmes and development of El Cajon. The dilution resulting from the issuance of these and other shares issued since our initiation note, has exerted a moderate negative influence on our valuation.

  The company’s treasury had been severely depleted prior to the recent placement and the current projected capital cost of a processing plant and mine at El Cajon is in the order of C$7m. This suggests a further cash raise will be required. Bacanora might obtain the funds through exercise of 7.05 million warrants that accompanied the shares sold in the recent placement. This would require the company’s share price to exceed the C$0.80 exercise price of the warrants and if this does not occur in the shorter term, a further private placement would be required. Once bulk samples can be produced from the pilot plant, consumers are likely to enter into supply contracts. This could open the way to production based financing, should financing be required.

• Bacanora is concurrently exploring its La Ventana lithium project
  Once the drilling at El Cajon is complete, Bacanora intends to move one drill rig to the La Ventana property, also in Sonora Mexico, for a second round of drilling. (The initial phase took place last autumn.) Management has tentatively set a budget of approximately C$1.0m for La Ventana. Drilling should commence in early September, with assay results expected late this year.

  The results of the first phase of drilling identified mineralisation averaging in excess of 1.0 percent lithium carbonate (Li2CO3) with significant intervals exceeding 2.0 percent Li2CO3. No resource has yet been delineated on the property but initial results are clearly encouraging.

• Our model for mining El Cajon remains unchanged from our initiation note
  We continue to envisage a low-cost (US$7.0m capex) mine at El Cajon that would process approximately 325,000 tonnes of material annually, producing approximately 53,000 tonnes of 40-percent colemanite per year. Based on the currently identified indicated and inferred resource, we model the mine with a life exceeding 20 years.

• Our valuation of Bacanora increases to C$1.10 per share
  Our base-case valuation of Bacanora Minerals increases from the C$0.81 per share discussed in our March 2011 initiation note to C$1.10 per share, based on the aforementioned developments. Our more optimistic assessment, based on higher confidences of exploration success, increases from C$1.09 to C$1.40 per share.

  Assuming success at all stages through feasibility and permitting, our base-case and optimistic assessments increase to C$1.51 and C$1.93 per share respectively. These revisions are the result of developments at El Cajon. Continued positive results from the La Ventana lithium project would add further to our valuation of Bacanora.