Bacanora (BCN.L) – Merger Arbitrage – 22% Upside

Current Price: £0.552

Offer Price: £0.675 (updated to c. £0.725)

Upside: 22%

Expiration Date: TBD

Press release


This merger arbitrage situation involves the takeover of lithium mining project listed in the UK. It involves a fair share of political/regulatory risk, hence the large spread. There are some interesting arguments suggesting that the market might be overestimating the regulatory risk.

On the 6th of May, Bacanora Lithium has announced a non-binding offer by its largest shareholder and world’s largest lithium producer Ganfeng International Trading (US$24bn market cap). Consideration stands at £0.675/share in cash. Ganfeng owns 29% of BCN and is definitely a serious and credible buyer. PUSU date to announce a firm offer is set for the 3rd of June. Scheme mergers in the UK require approval from a majority of shareholders in number and 75% of the votes cast in favor.

The main caveat and major reason for the spread seems to be risk of UK regulators derailing the transaction. Apparently, the British are concerned that their transition to renewable energy and EV could be impeded by Chinese control over the relevant minerals (cobalt, lithium). The government has recently released a bill updating its National Security and Investment Act and strengthening the foreign investment regulator’s powers to scrutinize, impose conditions or block transactions, which it considers to be threatening to the national security. Reportedly, certain politicians (e.g. former leader of the conservative party) are urging ministers to block the transaction:

There cannot be a better candidate for the first ministerial call-in under the new legislation than this deeply worrying acquisition that risks handing control over a critical resource of the future to a genocidal state.

The government is currently examining the creation of a national stockpile of rare metals.

Moreover, it has been reported that certain retail shareholders, which own a combined 5% of BCN are also opposing the takeover and are urging regulators to block it.

This regulatory risk is difficult to handicap, however, there are several points worth considering:

  • Ganfeng has been a long-term shareholder and partner of Bacanora. It currently owns 17.41% of the company, while its recent BCN equity subscription should close shortly raising Ganfeng’s stake to 29%. Moreover, Ganfeng also owns 50% of BCN flagship lithium project – Sonora Lithium and has already subscribed for 50% of its lithium production in Stage 1 of production and up to 75% of Stage 2. The project itself is located in Mexico. All of these facts suggest that regulatory concerns towards this specific merger could be overstated – this is definitely not some kind of an “out of the blue” takeover of a British lithium mine by a complete outsider from China. First of all, Ganfeng already owns a third of the company and is now only acquiring the remaining 50% in the Sonora project. Furthermore, the mine is not even in the UK and most of its production is already “promised” to Chinese (Ganfeng) and Japanese partners (Hanwa subscribed for the remaining 50% of stage 1 production). Stating that this takeover could somehow negatively impact the UK’s transition to EV clearly seems like an exaggeration.
  • Shareholder approval is unlikely to be a problem here. Aside from Ganfeng’s 29% stake, the other 3 major shareholders own about 25% of the company and are sitting on considerable profits relative to their initial share purchases. No opposition has been voiced by any of them. If the regulatory hurdle passes, I think most retail shareholders are likely to give in and approve the merger.
  • As mentioned above, the buyer is a credible and very well financed company. This is a small acquisition to them, however, Ganfeng has clearly shown a strong interest in Bacanora and likely better than anyone understands the value of the Sonora project. I think that at this point it’s very unlikely that the buyer will walk away from this deal.
  • I am not an expert in the mining industry, however, Sonora’s feasibility study numbers (presentation) look quite impressive – the mine is projected to have over 200 years of mine life, packs 8.8Mt of lithium resources with the estimated pre-tax NPV (8% yield) at US$1.25bn (vs current market cap of US$258m). This year has been great for the lithium sector and BCN states that the global lithium supply should grow at 19% CAGR (as compared to 11% during 2015-2018) to reach the estimated demand in 2025. Estimated production costs are also on the low end of comparable peers (2025 forecast):

bcn peers


The company owns 50% of Sonora Lithium project in Mexico, the other 50% is owned Ganfeng (the buyer of BCN). A feasibility study has already been finished, while financing for the construction has been secured. The company expects to start stage 1 construction in 2021 and start producing battery-grade lihtium products in 2023.

The company also owns a number other minor mining assets and has 44% stake in Zinnwald Platinum, which owns 50% in Zinnwald Lithium Project (Czech Republic).

bcn shareholders

  • M&G acquired most of its stake (13.5% of total) in 2019 at £0.25/share.
  • Robeco apparently bought shares only recently (Feb 8th) at around £0.45-£0.46/share.
  • Hanwa  is a Japanese trading house and strategic partner of Bacanora (subscribed for 50% of stage 1 production). Bought it’s stake in May 2017 at around 45p.

Further information:

Investor presentation

Investor brochure

2020 annual report


17 thoughts on “Bacanora (BCN.L) – Merger Arbitrage – 22% Upside”

  1. PUSU date has been extended to the 3rd of July with further potential extentions on the table. Ganfeng’s shareholders have approved the transaction (was never a risk) and the parties are still waiting for the Chinese regulatory approval (shouldn’t be an issue, but could take a couple more months). No update on the regulatory front in UK so far. The spread has narrowed to 16%.

  2. Ganfeng also announced on July 16 to acquire the Toronto-listed Millennial Lithium Corp (CVE:ML).

    Spread to the C$3.60 offer price stands at less than 4%.

    Arguably the two deals are similar in regulatory risks: ML’s mines are located in Argentina but company listed in Canada. Therefore, the deal requires Investment Canada Act approval but it is not really a Canada-based asset.

    Taking into account the fact that the ML deal already has a definitive agreement, the difference in spreads ( >15% for BCN and <4% for ML) is still quite interesting.

    Link to press release:

    About Millennial Lithium Corp (from corporate website):

    Millennial controls over 20,000 hectares of prime land in the heart of the famed “Lithium triangle” – home to the world’s most prolific lithium riches. In Argentina, the Company is advancing two lithium projects to a production decision. Both are located within an emerging mining district that is home several world-class lithium mines and in-development deposits.

    • The spread for Ganfang’s another ongoing acquisition target, Millennial Lithium (CVE:ML), has also widened in recent days, from less than 4% to more than 8%.

  3. The offer is now binding and the price has been increased. The new consideration now includes the previous £0.675/share in cash + 0.23589 shares in Zinnwald Lithium (Bacanora’s holding) per each BCN share. Zinnwald shares trade under the “ZNWD.L” ticker. The combined consideration is £0.7263, which still offers 10% upside from current price. Moreover, the buyer was able to get support from a major shareholder M&G Recovery Fund (13.7%), which puts the combined shares in favor at 43%, close to the >50% required vote threshold. Apparently, there was a group of retail investors that opposes this merger (holds 6%), however, the support of M&G Recovery pretty much destroyed their campaign. If I read this correctly, UK regulatory approval is not even required. Aside the shareholders’ vote, the offer has to be approved by Mexican antitrust, which shouldn’t be a problem when Ganfeng already owns 50% of Sonora project (BCN’s main asset in Mexico). (paywalled)

  4. Anyone hear anything new on this one? its been almost a month and the spread has widened to 13%

    • The spread is widening due to the prolonged Mexico regulatory approval process and limited updates on that front so far. Not sure why is it taking so long and why would Mexican regulators object to the merger if Ganfeng already controls half of the mine.

  5. Mexico’s regulatory approval was finally granted. Moreover, Ganfeng has reached the 75% acceptance threshold making the offer unconditional. So this transaction seems like a done deal and BCN shares trading will cease on the 26th of January. Despite that, BCN shares are trading slightly below the cash portion and at current prices, investors are getting Zinnwald shares for free. 6% spread remains.

    “Accordingly, Bacanora has informed the London Stock Exchange that it wishes to cancel the admission to trading of Bacanora Shares on AIM (the “Cancellation”). The Cancellation is expected to take effect at 7.00 am (London time) on 26 January 2022 (being 20 clear business days from the date of this announcement).”

    • It’s my understanding Bacanora is trading ex the Zinnwald rights right now. Zinnwald was spun off to all shareholders, whether they tendered or not. So anyone buying now will only get the Ganfeng merger consideration.

      • You are right, thanks for the correction – Zinnwald shares were distributed on the 22nd of December. So as the spread has been eliminated, we are closing this idea with 29% profit in 9 months.

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