Bacanora Minerals - A Possible Takeover Target

A short post today, as I have positions moving very quickly and I need to keep two eyes on them rather than just one.

To understand where I'm coming from with this post, we first have to lay down the global backdrop that we currently have in rare earth mineral demand:

- Increase in the demand for electronic products and electric powered vehicles.

- There currently are no feasible rare earth metal substitutes.


- Price volatility has the potential to be upwardly high (see 2010). I encourage people to read this - http://www.pcreml.com/rare-earth-pricing - to get an idea about how these can move; Bacanora Minerals is not all about lithium, remember.


- The global drive to renewable energy (and thus more batteries).

The export Quotas imposed by the Chinese government (which stopped in April 2011 I believe) are incredibly interesting, because they were perhaps representative of two highly significant potential  dangers that could be posed to China's global dominance in adding the value to rare earth minerals:

1. The political concern surrounding other BRIC nations and their potential to form a more efficient total supply chain (in terms of value added not mineral extraction) than China. 

2. The worries that a cheaper mineral extraction level could be seen elsewhere in the world.

What's particularly exciting about these quotas is that as the demand side factors above increase, there will likely be further influences from the Chinese government in a similar style to this - potentially driving the price of rare earth minerals higher.

Incidentally, there has been a lot of talk in the last month or two regarding how rare earth mineral prices are going to plunge as a result of new mining in Lapland. While this certainly could happen in five or six years, we're not likely to see any downward extraction based price movement until they've actually got something out of the ground.

In understanding that this global backdrop for rare earth minerals combines both a high demand and a volatile supply chain, we can see that value in this market has the potential to rise very quickly. 

This leads us nicely on to have a look at mergers and acquisitions rates in the rare earth sector:

The (arguably small and limited) information I'm going to analyse comes from the website for Pacific Century LTD-http://www.pcreml.com/mining-ma - a company I have never heard of, but regardless of my ineptitude, they have a fantastic website which I applaud them for!

The rather surprising thing about mining in general is that the total value of M&A transactions isn't as high as you would think. 

          No. of Transactions      Value/$bn        Metal Specific Transactions    Metal Specific Value$bn

2003     -                                    -                    164                                           16.1

2011   2605                             110                     -                                                -

2012   1803                             149                  507                                           45.8



The really illustrative points that are made on that website are here:

"Despite overall mining M&A being down in 2012, Metals M&A increased by 20% in 2012 to $45.8 billion (Asia Pacific dominates metals M&A with over 68% of all M&A activity).  The breakdown of transactions in the metals sector in 2012 was steel 51%, aluminium 4% and other metals 45% (as compared to steel 25%, aluminium 23% and other metals 53% in 2011)."

Fortunately for me, I don't have to do a lot of analysis here for the few highly unfortunate people reading this to get the point, which is that there's a clear move towards metal based M&A and specifically "other metals" - including rare earth metals. 

This period of M&A described above interestingly correlates with the bear market we saw from 2011-2012 (a good graph of this can be found here: http://alphanow.thomsonreuters.com/2012/10/chart-of-the-week-rare-earths-not-quite-as-rare/), which suggests that there are a lot of value hunters out there in the market. 

Now that the market has begun to rise again, it's quite likely that in the period before an exponential rise starts to really hit the market that we could see a strong revival of this attitude.

Now, I've already discussed before my views on Tesla and the chances that they might show an interest in Bacanora Minerals (perhaps a very optimistic view point), so I'm going to ignore this for now and direct people towards my previous article on them: 

http://themaskedstocktrader.blogspot.co.uk/2014/08/bacanora-minerals-analysis-of-tesla.html

After having somewhat messed up some calculations regarding BCN (fortunately for me a friend pointed it out) I have decided that I'm not cut out to talk about numbers for mining companies, so instead I am going to cheekily recommend that you go to the LSE forum (http://www.lse.co.uk/SharePrice.asp?shareprice=BCN&share=bacanora_min) and read Poetical's posts, which are exceptional and cover the numbers in a way that I could only dream of doing. Incidentally, that board is actually a very good one and there are many other posters on there which add serious value to the forum.



I'm not sure how I should conclude this post. I have effectively given some wider reasons why Bacanora Minerals has the potential to be a target of M&A, even though I haven't gone into the true depth of the company's deposit sizes and profit we could expect ($184m based on a $1,500 cost of production of lithium). So, I'm going to direct you to Poetical's LSE forum posts so anyone who hasn't had a good look through them can have a look at the in-depth numbers:


http://www.lse.co.uk/member-info.asp?page=6&nick=Poetical



All the best,

The Masked AIM Trader