Lithium powers Bacanora Minerals

Bacanora, which has a dual listing in Toronto, is a miner of high-grade lithium and borate in Sonora, northern Mexico. The company has recently completed a two-year pilot, so far revealing an indicated resource of 1.05m tonnes of battery-grade lithium carbonate, and a further 4.8m tonnes of inferred resources, all attributable to Bacanora. Based on current lithium carbonate prices of $6,000 (£3,925) a tonne, the company might well be sitting on resources worth $4bn-$23bn, after costs. That's a huge premium to the miner's £72m current market capitalisation.

Demand for lithium carbonate is already strong, and growing. Consumption is forecast to grow by 10 per cent a year between 2011 and 2025, according to research from signumBOX, with batteries for hybrid and electric vehicles accounting for 54 per cent of the total increase in demand for the metal, while demand from portable devices is also expected to more than triple over the period. And with 85 per cent of global supply controlled by just three companies, the fundamentals are there to push prices higher.

Last month, Bacanora signed a landmark agreement with Tesla Motors as one of a handful of lithium hydroxide suppliers to the electric car maker's Gigafactory in Nevada, a project which Goldman Sachs thinks could drain 17 per cent of the global lithium supply. The deal is for five years from the date Tesla places its first order, and providing Bacanora meets several production milestones. And if all goes well, Tesla has retained the option to extend the arrangement for a further five years.

Before this, Bacanora has several significant tasks on its hands. The most pressing is to complete a pre-feasibility study in the first three months of 2016, which will set the groundwork for a plant capable of producing 35,000 tonnes of lithium carbonate a year, with the potential to upgrade to 50,000tpa. That plant isn't going to be built without a significant capital-raising - likely to be at least $114m - funded through a mix of debt and equity.

Shareholders therefore face significant dilution, but the payback could be quick and impressive. By Bacanora's calculations, an operation producing 35,000tpa over 20 years would generate annual revenues of $210m, and have a net present value of $848m when discounted at 8 per cent. This is based on operating costs of $2,000 and an average lithium carbonate price of $6,000 a tonne. Based on this forecast, capital costs would be paid back in under two years. The prediction excludes exploitation of the inferred resource, or a possible ramp-up in production to 50,000tpa.