13 December 2018

METALS & MINING

Initiation of Coverage Marketing Communication (Connected Research) Bacanora Lithium#

BBG Ticker: BCN LN Price: £26p/sh. Mkt Cap: £35m BUY

Back Sonora; Convinced By Site Visit

Pilot Plant and Offtakes De-Risk Sonora Company Description Lithium exploration and development company Bacanora Lithium (BCN LN)# has developed and proven through three years of with assets in Mexico and Germany. pilot plant operations that it has a viable extraction process for its soft rock One Year Price Performance polylithionite project in Sonora, Mexico. BCN has consistently produced a 99.5% lithium carbonate and the strategic investment from Hanwa Co. and 10- (GBP/sh) Volume (RHS) (m shs) year offtake for 100% of stage one output verifies this process and confirms 1.60 Price (LHS) 8.0 that the pilot plant has significantly derisked the process design. This 1.40 7.0 1.20 6.0 confidence is further underpinned by the commitment of strategic, specialist 1.00 5.0 investors RK Mining and State General Reserve Fund of Oman. 0.80 4.0 0.60 3.0 Fundamentals, however, remain at the forefront of our investment case and 0.40 2.0 based on a WACC of 8.2% we derive an attributable NPV of US$935m for the 0.20 1.0 two-phase project capable of producing 17.9ktpa and 36ktpa Li2CO3 0.00 0.0 respectively requiring upfront capex of US$420m. Cash costs of US$4,350/t 12/17 3/18 6/18 9/18 12/18 (before by product credits) place the project attractively within the global cost Price % chg 1mn 3mn 12mn curve implying strong margins. The initial 20-year mine life uses just 7% of the -39.4% -31.8% -72.2x% Sonora resource, on our estimates, and remains open to expansion. 12mn high/low 149p/25p Consequently, we believe that one of the most attractive aspects of the project SOURCE: FactSet, as of 12 December 2018 close. for offtakers (and why it will be successful) is the ability to replicate the Market: LSE AIM modular design and scale production in line with rising global demand. Shares in issue 134.5m Target Price (p/sh. 115 Free float: 73.85% Lithium Fundamentals Continue to Strengthen Net cash (Jun 2018): £13.3m Enterprise value: £21.7m The lithium market is expected to grow 25% YoY in 2018 to 260kt LCE as Major shareholders demand for lithium ion batteries continues to grow. The demand outlook M&G Investment Funds 10.0% remains strong and consensus demand for 2025 is now at 1mntpa LCE. Blackrock 9.8% Benchmark Mineral Intelligence now estimate 1,148GWh of battery Hanwa Co Ltd 9.2% manufacturing capacity by 2025. Supply growth is, however, struggling to keep up. SQM (SQM US) will now produce 45kt LCE in 2018, -7% YoY, having initially guided to reaching a run rate of 70ktpa by year-end. Prices have therefore remained supported above US$16,000/t through 2018 for battery-grade lithium carbonate, while the medium term outlook has been strengthened by the rejection of Albemarle (ALB US) and SQM’s plans to raise output at the Salar de Atacama. End users are therefore compelled to seek supply outside of Chile to meet their needs. Recommendation and Target Price

The shares are down 76% YTD as weak lithium sentiment has driven lithium equities lower globally while BCN performance was compounded by the pulled financing. However, following our site visit we are convinced of the viability of Oliver O’Donnell, CFA, Natural Resources the Sonora project and that BCN has the expertise to deliver the attractive +44 (0)20 3617 5180 | [email protected] returns and the high quality LCE production promised.

We initiate coverage with a Buy recommendation and target price of 115p/sh.

#VSA Capital acts as Research Provider for Bacanora Lithium. This research brochure is a MARKETING COMMUNICATION. It is not investment research and has not been prepared in accordance with legal requirements designed to promote investment research independence and is also not subject to any prohibition on dealing ahead of dissemination of investment research.

Investment Case

We believe that Bacanora Lithium (BCN LN)# has positioned itself as one of the most significant lithium projects globally and has delineated a path to construction and production. The weakness in the shares this year, primarily caused by the decline in off spec lithium prices in China was compounded by the delay in completion of the project financing. However, we are convinced that the fundamentals of the project are robust with attractive economics , a strong operational team and viable processing capability. The decline in valuation therefore offers investors a highly attractive risk reward profile. Although the pilot plant significantly derisks the process risk with a market capitalisation of just £35m we believe that investors are deeply compensated for risks surrounding execution and the perception surrounding BCN being the first lithium producer to commercially exploit a soft rock deposit.

Investors should be reassured by the already strong list of expert shareholders and industry specialist groups that are backing the Sonora project. The initial drawdown of US$25m from the RK Mining facility means final engineering work is underway, along with preparations for construction. Project financing does, however, remain the key hurdle. Although following our recent site visit, we are convinced of the asset potential and ability of the management team to execute development.

Sonora Project Location

SOURCE: Company data, VSA Capital Research.

Our interpretation of the Definitive Feasibility Study (DFS) along with current macro assumptions results in a post-tax NPV of US$935m. Upfront capital cost of US$420m and cash costs of US$4,350/tpa imply strong free cash flow particularly once the capital intensive period is over after year five and stage two commences. We anticipate that first production will be mid-2021, (FY 2022) having assumed an additional six months of construction time given the inherent nature of delays in the industry. This assumes that the remainder of the project finance is secured in H1 2019.

Sonora Project, Overview

Stage 1 Stage 2 LoM Average

Li2CO3 Production, kt 17.9 36.0 31.3 Operating Cost (before by-product credits), US$/t 4,542 4,298 4,350 Operating Cost (after by-product credits), US$/t 4,097 3,862 3,912 Capex Requirement, US$m 420 370 15pa sustaining

Attributable Post Tax NPV Combined (8.2% WACC), US$m 935 SOURCE: Company data, VSA Capital Research.

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Currently the two phase project anticipates a design capacity of around 35ktpa although resource grades indicate that this can be exceeded. However, the resource defined to date which remains open has contained lithium carbonate of 8.8mnt LCE. This implies just 7% of the resource is used in the initial 20 years at these production rates. Therefore, given the expectations for lithium demand growth of the next two decades, BCN is in a strong position to further expand its capacity. Stage two involves replicating the processing plant of phase two and this modular design could be repeated to increase output in line with growing demand. This is a key reason we believe offtakers have found the project attractive because they can rely on a consistent supply of product where output can be scaled up. Given the importance of consistency in the lithium carbonate used in lithium ion batteries this is a key part of the investment case, in our view.

Sonora Project Overview

2020F 2021F 2022F 2023F 2024F 2025F 2026F 2027F 2028F 2029F 2030F

LCE output, kt - - 11 19 19 18 23 36 36 36 36 LCE price, US$/t 17,500 18,000 17,000 16,000 15,000 14,000 14,000 14,000 14,000 14,000 14,000 Revenue - - 153 345 292 261 332 521 521 521 521 EBITDA (12) (12) 69 249 196 165 158 331 330 330 330 Operating Profit (12) (12) 69 249 196 165 158 331 330 330 330 Net Income (12) (57) 26 151 105 84 79 200 199 199 199 Capex, US$m (200) (200) (21) (15) (175) (225) (15) (15) (15) (15) (15) FCF, US$m (200) (200) 28 159 (38) (109) 96 216 216 216 216

SOURCE: Company data, VSA Capital Research.

Our assumptions on cash costs, which we believe are conservative at US$4,350/t (DFS US$3,900/t) over the LoM imply strong EBITDA margins typically above 60% each year and an attractive position on the cost curve. SOP production of 35ktpa provides a modest boost to the economics however, our assumptions for cash costs before by-product credits of US$4,350/t are attractive in their own right, in our view. These assumptions would comfortably place BCN at the lower end of the cost curve in contrast to much of the near term supply growth which is primarily spodumene concentrate production. Once the cost of conversion of spodumene concentrate is included, hard rock production occupies the fourth quartile of the cost curve which to produce an end product is now as high as US$12,000/t in some cases.

Forecast Free Cash Flow and Capex, US$m

250 Capex, US$m FCF, US$m 200

150

100

50

-

(50)

(100)

(150)

(200)

(250) 2020F 2021F 2022F 2023F 2024F 2025F 2026F 2027F 2028F 2029F 2030F

SOURCE: Company data, VSA Capital Research.

Therefore BCN stands out versus its peer group. Brine processing relies on an arid climate and evaporation and takes months to produce a lithium carbonate product, whereas BCN’s pyromet and hydromet process, which has been

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extensively proven in its pilot plant and verified by multiple offtakers, combines attractive cash costs with a rapid production process which is not reliant on climatic conditions. Only a handful of hard rock producers intend to produce a final lithium carbonate product meaning that BCN provides investors with direct exposure to the lithium carbonate price and therefore to lithium-ion battery demand. Indeed, pilot plant production to date demonstrates that BCN can produce a 99.5% battery grade lithium carbonate, which is likely to be a market leading product once the ramp up has been successfully completed.

The fact that a lithium “clay” project has not yet been brought into commercial production has consistently weighed on BCN. However, given the successful operation of the pilot plant for the past three years, and the commitment of offtakers who are convinced by the viability of the process, we are confident that these concerns will be overcome; while at the current valuation this risk is more than compensated for, in our view. We believe that investors should think of the project as a soft rock lithium producer rather than a distinctive new source of lithium, particularly since the process flowsheet is conventional. We also highlight that brines only gained widespread commercial acceptance in the 1990s. Offtake Agreements Confirm High Quality Production Capability

BCN has an operational pilot plant that has now been producing a genuine battery grade lithium carbonate (“99.5% lithium carbonate”) from mine site bulk samples since 2015 demonstrating the practical viability of the flowsheet design as well as the capability and expertise of the operational team. As a result, BCN has secured offtake commitments from Hanwa Co. LTD. and also the State General Reserve Fund of Oman (SGRF) which, in our view, provides strong validation of the process, flow sheet and ability to produce a battery grade product. This is particularly true in the case of Hanwa whose experience in this highly technical market and deep understanding of required product specifications should demonstrate to investors its confidence in BCN’s ability to deliver on production and specification commitments.

In April 2017, Hanwa confirmed its commitment to BCN with a 10% equity investment in the company and commitment to purchase between 100% of stage one lithium carbonate production for a period of 10 years and the option to increase the offtake tonnage at stage two. Hanwa is a leading Japanese trading company and one of the largest traders of battery chemicals in Asia. Japan’s end users typically have higher quality thresholds for lithium carbonate than those in China and this is a strong endorsement of BCN’s final product. Hanwa has thoroughly vetted BCN’s process taking samples from each stage of the pilot plant processing from raw ore from the Sonora mine site through to intermediate processed products as well as testwork on the final carbonate product to confirm BCN’s capability of producing a 99.5% lithium carbonate. As a result of its commitment and comfort with the process and the project Hanwa have committed US$25m towards project financing.

The SGRF commitments include conditional equity funding of US$65m as well as the option to purchase 10ktpa of lithium carbonate produced predominantly during stage two. This further underpins confidence in the ability of BCN to deliver on its commitments, in our view.

Both offtake commitments will be priced according to prevailing market prices and each offtaker has the right to appoint a non-executive to the Board of Directors. The right of the SGRF to appoint a board member will only be active once it has fulfilled its conditional equity investment, as part of the construction financing. However, Hanwa has already exercised its right with the appointment of Junichi Timono, Head of Hanwa’s Specialty Metals & Alloys Department.

As well as product validation, BCN intend to use the pilot plant as a training facility for workers at the commercial scale plant. We believe that this derisks the ramp up of the stage one plant minimising the time taken to first production of battery grade product as BCN will have a workforce experienced in producing battery grade lithium carbonate. This is a crucial secondary function of the pilot plant and will enable BCN to commence commissioning the commercial plant with a well trained workforce with direct experience of the potential pitfalls associated with commissioning new equipment and operating safely and efficiently.

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The pilot plant will then be maintained and used concurrently as a training centre with a particular focus training additional labour for stage two. Additionally, BCN will also be able to test ore from future mining zones allowing optimisation ahead of feeding into the process plant. We therefore believe that to date the pilot plant has played a significant role in providing investor confidence and demonstrating the potential for high quality lithium carbonate to be produced from the Sonora deposit. Development Timeline and Financing

The Sonora project has fallen behind schedule as a downturn in lithium equities, due largely to the decline in pricing for off spec product in China in the early part of 2018, compounded by weak sentiment towards basic materials stocks, owing to China US trade tensions meant that the completion of financing has been delayed. That said, BCN has already partially secured the financing from RK Mining and drawn down an initial tranche of US$25m, which is being used to fund the final engineering design work and commence preparation for construction.

As a result of the delays to financing and weak sentiment towards lithium equities the shares are down 76% YTD, which has further increased the challenge of funding the project. However, we believe that the fundamentals of the project remain attractive with a strong lithium market outlook, viable process and attractive project economics. We believe that the stronger than consensus market pricing in lithium in H2 2018 will drive a rerating of the sector in H1 2019 and we therefore expect BCN to secure funding by the end of the period. With full funding in place we expect a construction period of around 18-24 months.

Plant commissioning is likely to take around 12 months to fully achieve ramp up to produce battery grade product. The operational team estimate that production for the first six months would not result in the production of a battery grade product whilst the processing plant is optimised. This product would then be reprocessed once the plant was optimised; for this reason year one overall recoveries are forecast at around 50% compared to the 75% long term target versus 74-78% in the DFS.

Permitting is in place regarding the mining license and the environmental impact approval (Manifestacion de Impacto Ambiental approved in Q3 2017). The land use change application, Estudio Tecnico Justifiactivo (ETJ) has also been approved and is required before construction can commence. Regarding water rights BCN has been approved to use water from the local aquifer, although the surface water rights remain outstanding with regard to the potential impact from the project. Surveys to improve the proposed access route are underway although access has not yet been granted by private owners. BCN has strong local relationships and a local country manager who is well connected and has played an important role in securing permits and effectively negotiating local politics. Financing Agreements and Shareholder Register

We believe that the support from existing shareholders, conditional agreements for further funding and the RK Mine Finance facility provide a strong cornerstone which totals US$265m of the required US$420m. We assume that the full NI43-101 FS amount will be raised along with a further US$40m for additional working capital and we anticipate a debt to equity split of around 60/40.

• Hanwa have a 10% shareholding and a lithium carbonate offtake agreement covering stage one production over the first ten years at market pricing and US$25m in equity as part of the project financing.

• SGRF have proposed a US$65m investment conditional on the full financing being achieved.

• RK Mine Finance have provided US$150m in debt financing split between three tranches charging LIBOR plus 8% payable on drawn down principal. The facility is structured as two Eurobonds listed in Jersey issued with a purchase price of US$138m and US$12m and terms of six and 20 years respectively. On the first, interest is being capitalised every three months during the initial 24 month period and is then payable in cash for each three months after that while on the second the nominal amount is repayable by reference to a monthly production of lithium at US$160/t with the remainder payable at the end of the term. The facility is to be drawn in three tranches of US$25m, US$50m and US$75m pro rated across the two bonds.

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With offtakes in place we believe that BCN will be able to secure the remaining portion of the required debt facility. Aside from these commitment by strategic players, BCN has a strong register of blue chip investors whose positions have been firm despite the share price decline. We believe that this combination of shareholders with deep experience of mining and lithium provides a compelling validation of the potential that has been recognised in BCN. This is with the exception of Orr-Ewing Estate which reduced its position following the death of Colin Orr-Ewing. The institutional shareholders on the register listed below account for approximately 55.55% of the outstanding share capital.

Strong Institutional Register

Top Shareholders Holding, %

M&G Investment Funds 10.0% Blackrock 9.8% Hanwa Co., LTD 9.2% Cadence Minerals 7.0% Igneous Capital Limited 7.4% The Capital Group 6.4% D&A Income Limited 3.5% Orr-Ewing Estate 2.3% SOURCE: Company data, Bloomberg, VSA Capital Research. As of December 2018

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The Process: PFS Flowsheet Design

Lithium production is a chemical process and producing a battery grade product is a highly precise and technical process. Despite this BCN has consistently proven its ability to produce a 99.5% LCE product which is impressive. We believe that the successful operation of the pilot plant and commitment of offtakers in terms of project financing and to the product should provide investor confidence that market experts are supportive and have validated the process.

BCN does not use any proprietary technology and has developed a flowsheet utilising conventional technology. The processing lines at the pilot plant are not identical to those of the DFS design flowsheet and this is due to two factors: the pilot plant was originally constructed as a borates plant and also the practical cost of certain equipment such as crystallisers are not feasible for a pre-production company still in development. Despite these minor differences BCN has consistently demonstrated to potential offtakers that it can produce a high-quality product and offtakers have successfully undertaken testwork on unprocessed ore as well as intermediate products to confirm that each stage of the BCN process is valid.

Beneficiation

In the current pilot plant a multi stage crushing circuit is used to separate gangue material and right size ore, however, in the design flow sheet a 2.6 MW SAG mill combines the sorting and crushing along with the addition of limestone (calcium carbonate). Although calcium is present in the ore, by adding additional calcium via limestone BCN is able to more accurately maintain a specified level of calcium in the beneficiated ore product. Oversized material recycles back into the SAG mill while the undersize is pumped to hydrocyclones where it then feeds to a concentrate thickener and then a filter. This produces a filter cake ready for the next stage of the process.

Raw ore at Hermosillo Pilot Plant Pilot Plant Beneficiation Circuit

SOURCE: VSA Capital Research.

Extraction and Purification (Pyrometallurgical and Hydrometallurgical Process)

The next stage involves the addition of reagents to the beneficiated feed. Dry gypsum and sodium sulphate are added to the feed and transferred to briquetting machines. The briquettes are then deposited on a solar pad for drying ahead of roasting. In the pilot plant a rotary kiln is currently used for roasting, however, in the DFS it is envisaged that an alternative modified conventional kiln process will be used, which has significant capital and operating cost advantages. Currently this design is being finalised with EPC contractors. The handling of the kiln waste gas is via a dry, hydrated system followed by a bag house; given the limited water available on site and BCN’s determination to minimise the environmental impact of production this is an attractive solution. The roasting phase of the process converts lithium compounds within the beneficiated feed to water soluble lithium sulphate.

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Pilot Plant Briquetting and Solar Drying

SOURCE: Company data, VSA Capital Research.

Following the roasting phase the briquettes move to a ball mill and are then discharged via a trommel. The mill discharge enters hydrocyclones to be right sized and the overflow enters the roast leach tanks. Oversized material is reclaimed for dry tailings storage. During roast product leaching, lithium sulphate along with water soluble metal sulphate impurities of iron, magnesium, calcium, aluminium, sodium and potassium leach into solution. This solution is then thickened before passing onto purification and again waste products are transferred to the dry tailings area. There are no environmentally hazardous materials contained in the tailings.

The purification stage treats the thickened leach overflow to remove impurities. Sodium carbonate is added which converts metal sulphates to metal carbonates while also producing sodium sulphate. The purified solution is then pumped and filtered to produce a filter cake. The filter cake is transported to dry tailings while the filtrate moves to the next stage; the Glauber Salt Extraction Circuit. Glauber’s Salt (hydrated sodium sulphate) extraction takes place by flash cooling in a vacuum and the resulting crystals are extracted via a centrifuge producing a solid cake. The centrate, containing lithium, is collected in a tank which moves onto PLS evaporation. The next stages of purifying reduce the caesium and rubidium before being excess water is removed. The concentrated PLS is then pumped through activated alumina for the removal of fluorine and calcium. The final step before lithium carbonate precipitation is boron removal via ion exchange. Lithium carbonate precipitation consists of four agitated tanks operating in batch mode.

This lithium carbonate still contains impurities and must if necessary be repulped and recentrifuged to remove additional impurities before bicarbonation. This final purification stage involves the addition of carbon dioxide gas to convert lithium carbonate into soluble lithium bicarbonate. The ion exchange circuit then removes the residual calcium and magnesium and the lithium carbonate is recrystallised at a temperature of 95°C. This slurry is then batch pumped to bicarb centrifuges to recover the solid lithium carbonate; this is then dried before being packed for shipping.

The feed to the glaserite crystallisation is the barren liquor left from lithium carbonate precipitation after impurity removal. This slurry is pumped to the glaserite centrifuge with the solid cake proceeding to the SOP crystalliser while the centrate is recycled back to the Glauber Salt Extraction Circuit. The solid potassium sulphate cake is then dried and packaged.

At each step in the process BCN will test product to ensure that it is delivering a suitable intermediate product for the next processing stage. Material where the requisite level of impurities have not been removed can be reprocessed to ensure that the quality is maintained throughout the process. In the pilot plant this is relatively straight forward since the process lines are not automatic and continuous. This does have the advantage of greater input from the operational team which is beneficial at the pilot plant stage since it is being used for education and training. However, at the commercial plant this will be more challenging.

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Unfiltered Lithium Carbonate Filtration

SOURCE: Company data, VSA Capital Research.

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Simplified Flowsheet

SOURCE: Company data, VSA Capital Research.

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Mexico & Sonora

Mexico has a long mining history and is considered a favourable operating environment as the largest silver producer and a leading producer of gold, copper and zinc. It has a well-structured and supportive regulatory framework although some proposed changes to the system have prompted recent concern by investors. The northern states of Chihuahua, Zacatecas and Sonora, where BCN’s project is located, are the core locations for mining and the industry forms a significant part of direct and indirect regional GDP and around 6% for the country as a whole. Consequently, the President elect’s MORENA party which have proposed the changes have been quick to quell negative headlines given the importance of the industry.

Corporate income tax is levied at 30% for mining companies and since January 2014 a 7.5% mining royalty based on EBITDA. This royalty is deductible against corporation tax also, however, there have been a number of legal challenges to the basis of calculation. Since BCN is producing a highly refined chemical product and is not selling a product from the mined part of its operation it is not clear to what extent the impact on BCN might be. BCN is also subject to a royalty of 3% payable to the Orr-Ewing estate on all lithium revenues.

Environmental and Social & Corporate Governance

The recently mooted changes to the laws are unlikely to have a significant impact on BCN, in our view. The changes relate to more stringent environmental regulation and greater scrutiny of corporate and social responsibility (CSR) and the issue that has caused most concern amongst investors is the proposal that if firms do not adequately fulfil their CSR obligations then mining concessions could be revoked. MORENA has said it will not implement any policies without weighing arguments and gaining industry and community views.

With regard to BCN we believe that the social and environmental impact of the project has played a key role in the success of the project to date. This is likely to be a globally significant project due to its low environmental impact. With no liquid waste stream, no acid rock drainage, dry stack tailings (no tailings leakage) and no heavy metal contaminants the Sonora project has limited risk. Currently the tailings is on surface for the first twenty years beyond which the mine maybe backfilled. Furthermore, the specification of the flow sheet which enables water to be recycled means that the impact on groundwater is minimised and there is no liquid waste stream. Given the rationale for the shift to electric cars and stationary storage systems which enhance the potential for renewable energy we expect investors to place increasing weight on the impact of supply chains on the environment.

From a local community perspective, BCN has to date employed local workers to operate the pilot plant and intends to train the larger workforce at the pilot plant with local workers again prioritised. The perception towards new employment potential is viewed positively and enhanced by the scale of the project which indicates long term employment for communities which are largely currently confined to pastoral livestock and agricultural employment currently. There is no other type of land use over the planned site areas. Furthermore, the SOP byproduct is likely to be sold locally which would potentially be supportive of the local agricultural industry.

Across the planned site areas there are no indigenous inhabitants, which have been specifically cited in the proposed changes to laws, with regard to the impact of mining. Furthermore, the newly installed Mayor has positively engaged with BCN to date and is positive on the potential for new sources of employment. For these reasons we believe that BCN is not particularly exposed to the potential changes if indeed they are implemented.

Site access has not yet been fully negotiated and surface rights must be purchased for plant and mine site. The majority of the land is currently owned by individual land owners, however, the current planned access road does pass through an ejido, a communally owned farm, and naturally there is a risk when negotiating with an entity which has a more varied group of interests that there is potential for disunity. However, overall we believe that the local community is supportive of the potential benefits to the local area.

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Concession Areas

BCN has an interest in 10 concessions in Sonora, Mexico owned via two local subsidiaries. The lithium licenses are held by Minera Sonora Borax SA de CV which is 99.9% owned by Mineramex, which is 100% owned by BCN. BCN also owns 70% of both the Minera Megalit SA and Mexilit SA these contain the concessions which BCN intend to mine in phase two and beyond to extend the mine life. Each mining concession is valid for fifty years and are valid until between 2060-2065.

BCN Concession Areas

SOURCE: Company data, VSA Capital Research.

The concessions are located in the northwestern state of Sonora in Mexico, 180km to the northeast of Hermosillo and around 170km to the south of the US border. The closest village is Bacadehuachi, which has a population estimated at around 1,100 and is roughly 11km to the north of the planned mine site. It is currently accessed via unsealed roads.

Plant Site Flattens Out

SOURCE: Company data, VSA Capital Research.

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Average elevation of the project area, which is located between the Meas de Enmedio, Rincon del Sauz and El Capulin mountain ranges, is 900m above sea level and a maximum of 1,440m above sea level. The area has deeply incised valleys where clay units outcrop in places. However, around 2km to the south of the planned mine site the topography is far shallower and lends itself more favourably to construction. This is where the processing plant is due to be built with ample additional space for plant expansion. Dry stack tailings will be stored in an adjacent valley. No construction ore mine infrastructure is due to be built over known lithium-bearing mineralisation.

Concession Maps Show Upside Potential Beyond Proposed Mine

SOURCE: Company data, VSA Capital Research.

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Deposit Geology & Mining Methodology

The mining aspect of the Sonora project is low cost, simple open pit continuous mining as might be used in coal or similar soft rock bulk mining. This is made possible as the lithium-bearing sequences are easily accessible, distinct and easily distinguishable. Blasting will be required initially to remove the cap but the nature of the deposit as an exposed gently dipping escarpment means that the need for blasting is limited and the initial strip ratio will be close to 1:1 although rising to 4.1 over time.

The Sonora Deposit Trench 4 Upper clay visible with intercalated silica

SOURCE: Company data, VSA Capital Research.

The lithium bearing sediments occur in two bedded sequences capped by basalts and separated by an ignimbrite sheet. The upper mineralised intervals are a combination of tuffaceous claystones and sandstones while the lower unit is reworked tuffs. The upper unit has mineralised intervals over 25% to 80% of the overall true thickness (14.1-40.39m) and 40% to 100% of the lower unit (21.57m-42.11m true thickness) depending on the cut off used. Formation is thought to have occurred via hydrothermal alteration as a result of alkaline volcanism effecting volcanoclastic sediments. Both the upper and lower units are interspersed with small layers of up to 30cm of silica, however, this will be easily sorted in the first beneficiation stage of processing.

Outcropping Upper Clay Visible at Surface

Upper Clay

SOURCE: Company data, VSA Capital Research.

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Grades in the Ventana zone are highest at on average above 3,000ppm Li. Although in the areas of higher grade lithium other impurities such as calcium, caesium, magnesium, potassium, rubidium and strontium are also present in higher concentrations. The resource remains open at depth and along strike and there is considerable further exploration potential within the broader Megalit license area. Consequently, we see this mine plan as a starting point with significant upside giving the project scalable potential. This is particularly attractive to offtakers, in our view, given the demand expectations for market growth over the next decade at least. Offtakers cite consistent product as a priority, therefore we view the large resource lithium project as the most attractive source of supply given the expecta tions for market growth. Indeed, the current mineral resource contains 8.8mnt of lithium carbonate equivalent whilst production over the planned 20 year mine life exploits just 7%, indicating the potential to scale up output and extend the mine life to meet the expected growth in the lithium market is possible, in our view.

Resource Stratigraphy

SOURCE: Company data, VSA Capital Research.

The lower unit is higher in grade than the upper unit on average across the resource. Consequently, Ausenco (the FS contractor) determined that it would be more efficient to high grade production and to stockpile this ore for processing at a later date. The current mine plan therefore does not envisage incorporating upper unit ore until year 11 when the ore from the Fleur concession feeds into phase two. The current mine plan commences in the 99.9% owned La Ventana concessions and transitions to the Fleur claim from year 11 where BCN has a 70% interest. Currently our assumptions assume that the economic interests across the concessions remain unchanged, however, we do not rule out the potential for a deal which gives BCN a 100% interest across the resource.

Sonora, Reserves and Resources

Grade Contained

Classification Tonnes, mnt Li, ppm K, % Li, kt LCE, kt K, kt

Proven 0.08 3,905 1.6 313 1,666 1.3 Probable 0.16 3,271 1.4 535 2,849 2.7 Total 0.24 3,480 1.5 848 4,515 4.0 Measured 103 3,480 1.5 359 1,910 1,532 Indicated 188 3,120 1.3 588 3,130 2,460

Measured & Indicated 291 3,250 1.4 946 5,038 3,993 Inferred 268 2,650 1.2 710 3,779 3,101 SOURCE: Company data, VSA Capital Research.

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Although there is a clear tradeoff in terms of how BCN shareholders benefit from the mine plan given the ownership. The higher grade of the Fleur concession area is offset by a higher strip ratio given that the ridge in La Ventana can be mined directly and there is more outcropping.

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Model Assumptions

Capital Costs

The PFS for the BCN produced a stage one capital cost of US$420m (including a 10% contingency) of which US$343m is related to the processing plant. This is scalable in a modular fashion and therefore the stage two expansion cost is expected to be at the same level. The remaining capital relates to local infrastructure, currently only unsealed roads lead to site from the closest village, Bacadehuachi, which is around 11km away.

We believe that there are a number of factors which give us confidence that further capex inflation is unlikely. Firstly, the pilot plant has enabled BCN to fine tune its flowsheet design and derisk the processing plant as much as reasonably possible. This along with the experience of the on site operational team have enabled BCN to opt into an Engineering Procurement and Contract rather than an Engineering, Procurement and Construction Management contract. This means that the shortfall risk of cost overruns lies with the EPC contractor. The emphasis on design and project management is therefore on BCN and we believe that the necessary expertise is already in place with Eric Carter, Project Director, who has over 22 years of lithium carbonate experience with FMC in North America and has been intimately involved at the pilot plant having joined BCN in 2015.

Capital Cost Summary, US$m

Stage 1 Stage 2

Mining Equipment 14.2 17.6 Mining Infrastructure 3.4 0 Beneficiation Plant 18.5 18.5 Lithium Processing (Extraction) Plant 158.3 158.3 Common Plant Services 55.3 55.3 On-Site Infrastructure 37.8 20.5 Off-Site Infrastructure 21 3.1 EPC / Owner's Costs / Indirects 72.9 72.4 Contingency 38.1 34.6 Total 420 380 SOURCE: Company data, VSA Capital Research.

Our model reflect two periods of capital intensity, initially with funds deployed during the 18 month construction period and again in 2023 and 2024 over a similar time frame as the second plant is built for stage two. The delay to funding has meant that the pre production working capital requirement is now likely to be higher than previously estimated. Although we expect robust free cash flow from the project we anticipate that further debt funding will likely be required to fund stage two construction. However, this will likely be more readily available to a producing and profitable company.

We recognise the fact that capital intensity for stage one at US$24,000/t is at the upper end for the industry, however, we believe that this risk is offset by other factors and rising costs elsewhere mean that BCN appears attractive, in our view. Indeed, while at greenfield brine projects the capital intensity is typically around US$16,000/t with consensus capital costs for a 25ktpa LCE plant currently around US$400m. Orocobre (ORE AU) have guided to US$285m for brownfield capacity of 25ktpa implying capital intensity of US$11,400/t. However, ORE’s ramp-up has demonstrated the challenges associated with ramping up brine production and the difficulties in relying on natural evaporation rates. In early 2018 these disappointed, falling to the lowest level since 2011 due to above average cloud cover and rainfall. The lengthy wait for evaporation also means that the commissioning process is significantly longer even if target rates are achieved which therefore means a longer time between commissioning and commercial production.

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Peers Capital Intensity

Output Capex, US$m Capital Intensity, US$/t

Lithium Americas (Thacker Pass) 30 581 19,367 Ioneer (Rhyolite Ridge) 20 599 29,950 Bacanora (Sonora) 17.5 420 24,000 SOURCE: Company data, VSA Capital Research.

For the direct peer group that intends to produce lithium carbonate as a final product, BCN compares favourably, in our view. Phase one capital costs of US$581m for Lithium Americas (LAC CN) Thacker Pass clay project, which is perhaps BCN’s closest peer, imply a higher capital intensity based on annual output of 30ktpa of US$19,400/t. Ioneer Ltd (INR AU) for its Rhyolite Ridge project in Nevada has indicated capital costs of US$599m for annual output of 20ktpa which implies US$30,000/t capital intensity if measured on the same basis as the other projects, which excludes byproduct credits.

We would argue that directly comparing the significantly lower project capital intensity of projects designed to produce a spodumene concentrate typically containing 5-7% Li2O and requiring further refining by Chinese conversion plants is unfair. Currently, conversion costs at Chinese plants are estimated at an average all-in cost of US$9,200/t on an LCE basis according to Roskill although estimates are as high as US$12,000/t.

Since 2009 lithium carbonates price have risen approximately 280% to US$16,500/t while over the same period spodumene concentrate prices have risen just 150% to around US$1,000/t. As an intermediate and significantly lower value product, spodumene concentrate has a lower gearing to the battery market and the comparison of an entirely different processing line is not a fair reflection of the capital required to produce a battery grade lithium carbonate. Production Forecasts

We anticipate that plant commissioning will commence at the start of 2021 assuming funding is secured in H1 2019 meaning an 18-24 month construction period. We anticipate that plant commissioning would take six months before a fully refined battery grade product could be consistently produced. While we don’t rule out the potential for unforeseen disruption we believe that the commissioning process has been significantly derisked versus BCN’s peers where ramp ups have struggled to reach capacity. We stress the importance of the pilot plant which means that the operational team as a whole will be familiar with many of the likely issues to be faced in the ramp up while the team that Peter Secker has assembled on site has, unlike many peers, direct and extensive experience of lithium carbonate production. Given the importance of delivering a high quality product which meets offtakers requirements we cannot stress enough the value of this experience to BCN.

Consequently, we anticipate that around 9kt LCE will be produced in year one, ramping up to 16kt LCE in year two and to full capacity beyond that. We are modestly more conservative versus the PFS in terms of the ramp up given the tendency for delays across the industry. We expect combined recoveries across the project to dip in year five as the stage two plant is commissioned and after this we expect steady state production for the remainder of the forecast period. Lithium Price Outlook

Achieving the required battery grade of product is a critical part of the project economics as it will inform pricing negotiations. Current market dynamics are heavily influenced by product quality. BCN has demonstrated that its process can produce a 99.5% lithium carbonate suitable for lithium ion batteries consistently and well beyond the bench test scale of its peers.

Albemarle (ALB US) has stated that it has committed 87% of its lithium carbonate output to 2021 on contracts with minimum prices at 2018 levels and with minimum purchase agreements. This should highlight to investors the challenge in securing supply for end users. In 2018 there has been a significant diversion in the contract price and the “spot” price of off spec lithium products and the discount that exists is in part due to the varying impurities between

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each producers products. Currently SQM produces the highest quality product in terms of impurities although even this requires some refining to make it suitable for electric vehicle lithium ion batteries which are more demanding in terms of spec than those of personal technology such as laptops and mobile phones.

Currently we use the SQM price as a benchmark for gauging a battery grade lithium carbonate price, however, it is important to highlight that each of the major producers receives a different price. The higher the level of impurities in a product the lower the price, cet par, as even the higher quality products produced by SQM, ALB and Livent (LTHM US) must be reprocessed by Chinese or Japanese conversion plants to make them suitable for use lithium ion batteries.

We believe that with consensus demand now projected to grow to 1mntpa by 2025 for lithium carbonate and given the difficulties that are now affecting Chile which prevent the expansion of output by the majors SQM and ALB at their Salar de Atacama operations. The competition for water between the lithium producers and nearby copper miners has meant that the Chilean regulators have capped expansion using traditional water intensive lithium production processes while ALB has been further hampered by a dispute over royalty payments. Therefore, we see large scale project outside of Chile as strategically important for end users sourcing lithium carbonate and believe that given the strong and growing demand projections that this supply shock will keep prices higher for longer.

VSA Capital Lithium Carbonate Price Forecast

2015A 2016A 2017A 2018 2019 2020 2021 2022 2023 2024 LT

6,500 7,400 13,900 16,500 17,000 17,500 18,000 17,000 16,000 15,000 14,000 SOURCE: Company data, VSA Capital Research.

As much as 95% of the current lithium market is currently priced based on medium to long term contracts. Therefore, marketing and offtakes are important to lithium companies as product cannot simply sold on exchange or to traders. End users are willing to sign long term offtakes because being able to rely on a high quality and perhaps more importantly, consistent product is key to producing lithium ion batteries.

BCN has to date through its chemical process demonstrated that it can produce a 99.5% lithium carbonate product. This requires little or no further refining and therefore we believe that BCN has the potential to produce a premium product which would help the company gain market share and stronger revenues. This would enhance the company’s ability to scale up beyond 35ktpa to fully exploit the significant resource potential that exists beyond that already defined. Operating Costs – Attractively Positioned on Cost Curve

Lithium Carbonate Cost Curve 2017 Lithium Carbonate Cost Curve 2020

Current Carbonate Market Price Range ($11-16/kg) Current Carbonate Market Price Range ($11-16/kg)

EstimatedCost Cash

Estimated Cash Cost Estimated Cash

Estimated Total 2017 Demand Estimated2017 Total

Estimated Total 2020 Demand Estimated2020 Total

kMT

kMT 200 200 335

SOURCE: Company data, VSA Capital Research.

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We forecast operating costs over the LoM of US$4,350/t (DFS LoM 3,900/t) excluding by product credits and US$3,900/t including SOP credits. We have applied our own assumptions for local inflation given the IMF outlook for Mexico and the fact that the DFS was published in early 2018 and we expect production to commence in 2021. This does, however, remain within the DFS ±15% margin for error and more importantly continues to be attractive within the global cost curve. Again we highlight the fact that spodumene concentrate production and margins do not reflect the all in cost of lithium carbonate production and with cash costs of between US$5,000/t and US$12,000/t LCE. This is the marginal production and currently where supply growth is focused suggesting that the lithium supply cost curve is shifting higher. When directly compared to the comparable peer projects at LAC and INR, BCN also appears attractive, in our view, and is not reliant on performance of byproducts to obtain an attractive position in the cost curve.

Direct Peers Operating Costs; BCN not reliant on by-product credits

LoM Cash Cost (before credits), US$/t LoM Cash Cost (after credits), US$/t

Lithium Americas (Thacker Pass) 4,068 2,570 Ioneer (Rhyolite Ridge 7,791 1,796 Bacanora (Sonora), VSA Assumption 4,350 3,912 SOURCE: Company data, VSA Capital Research.

Although brine supply is typically placed at the lowest end of the cost curve with SQM operating costs estimated at US$3,000/t other brine projects come in higher such as Orocobre (ORE AU) where FY Q1 2019 cash costs were US$4,640/t up 22% QoQ, albeit on below capacity output.

The soft nature of the rock, low initial strip ratio and ability to use continuous mining mean that the mining costs only contribute up to 12% of annual operating costs i.e. up to around US$500/t LCE pa. The majority of the costs relate to the processing plant and in particular the cost of reagents (66%) and power (19-22%). The processing plant requires a number of different reagents and consumables in order to produce lithium carbonate. The most important in terms of cost contribution are sodium carbonate and compressed natural gas. Sodium carbonate is more commonly known as soda ash and it is the reaction with lithium sulphate that produces the crude lithium carbonate that is then purified. Market prices are subject to change and we have included a rudimentary sensitivity analysis to demonstrate the impact of changes to both gas and soda ash prices against the price in the FS. Current estimates are, however, in line with long term consensus based on Henry Hub and local market pricing respectively although we note the recent rally in Henry Hub gas pricing. In the worst case scenario we present BCN continues to operate with competitive cash costs in a global context.

Reagent Cost Sensitivity

VSA Base Case, LoM Unit Cost Gas price and soda ash price +100% Gas and soda ash price -50%

After by-product credits, US$/t 3,912 5,143 3,296 Before by-product credits, US$/t 4,350 5,581 3,734 SOURCE: Company data, VSA Capital Research.

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Macro Assumptions

We incorporate adjusted IMF macro projections into our model for BCN, which imply modest levels of inflation in Mexico. The IMF outlook for currency is broadly stable and despite an increase in volatility over the past two years it has traded in a range of approximately 18-22 MXNUSD. The USD will be the overriding currency exposure with reagents purchased and lithium carbonate sold in USD. Labour will be the only cost predominantly denominated in local currency. We anticipate that K2SO4 (SOP) will be sold locally and in line with the PFS we use a flat US$550/t over the LoM.

Key macro assumptions

FY 2016A FY 2017A FY 2018 FY 2019F FY 2020F FY 2021F FY 2022F LT CPI, % (Mexico) 3% 6% 5% 4% 3% 3% 3% - USD/MXN 18.7 18.9 19.6 20.1 20.3 20.5 20.7 20.7 SOURCE: IMF, VSA Capital Research. Taxes & Royalties

BCN will be subject to a corporate tax rate of 30% in Mexico. A 3% royalty on revenue is payable and BCN may also be eligible to pay a 7.5% royalty on mining profits (EBITDA) depending on the classification of the product sold as a chemically processed product or mined. The company intends to formally split the operations into mining and chemical processing divisions utilising transfer pricing in line with Mexican standards.

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Zinnwald JV (50/50)

The Zinnwald project in Germany is a 50/50 JV between BCN and Deutsche Lithium GmbH covering two license areas of a total 2.56km2 valid until 2047. The project is located 35km south of Dresden in Saxony within a low mountain range of up to 800m above sea level. The project offers shareholders exposure to the belatedly growing European lithium market which currently imports almost the entirety of its current requirements. As the lithium ion battery market grows this is likely to displace current sources of supply from traditional chemical end users and with the intent to produce lithium fluoride BCN is seeking to fill the gap. Having defined a sizeable resource close to end users we look towards the FS to confirm robust economics and the process design providing an additional catalyst in 2019.

The current valuation for BCN does, however, highlight two key points. Firstly the deeply undervalued nature of the stock; using a peer based EV/t multiple of US$138/t we derive an attributable value of £38m for the resource which is greater than its current market capitalisation of £35m. BCN has the right to acquire the outstanding 50% on completion of the PFS, due Q2 2019, for €30m; attractive based on our valuation metrics. However, our second point is that the project is likely to remain as a JV, certainly in the near term, as we believe that the company’s focus at this time will be on the Sonora project given the challenge that lies ahead in terms of project financing.

The project is a brownfield tin-tungsten-lithium deposit which operated as an underground mine. Although in the heartland of Germany’s tin-tungsten mining region, during WW2 7.7kt of ore was mined for lithium. Production ceased at the end of the war. Lithium is borne in a mica known as Zinnwaldite which is associated with the altered greisens which occur as shallow dipping sheet like ore bodies of up to 40m but typically of between 2-15m in thickness as well as in high angle vein structures. The greisens have formed as a volcanic intrusion into the Teplice Rhyolite.

Project Location Resource Model, 2018

SOURCE: Company data, VSA Capital Research.

Diamond drilling from within the adit and from surface totalled 88 holes between 2011 to 2017 enabling an NI 43-101 compliant resource report to be announced in September 2018. The project is now being progressed to NI43-101 FS stage to be released in Q2 2019. The resource announcement represented a modest increase to the previously announced PERC compliant resource from 2014 and with the resource now compliant with the more widely recognised standards we believe this provides greater comfort for investors as the project moves towards a NI43-101 FS in Q2 2019.

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Zinnwald Resource, September 2018

Tonnes, kt Li Grade, ppm Contained LCE, kt

Measured 18,510 3,630 357,658 Indicated 17,000 3,399 307,579 Inferred 4,865 3,549 91,907 Total 40,375 3,523 757,144 SOURCE: Company data, VSA Capital Research.

In terms of exploration upside the resource remains open to the west while in early 2018 the JV received additional permitting over 295ha at the Falkenhain deposit, which is located 5km away and exhibits similar geology to Zinnwald. Deutsche Lithium plan to explore over the next five years to potentially extend the project life beyond an initial 25 years from Zinnwald alone.

Drilling highlights from the 2017 programme included:

• 30.6m at 3,627ppm Li from 136m • 21.7m at 5,894ppm Li from 276m • 3.8m at 6,240ppm Li from 119m • 11.1m at 4,693ppm Li from 92m • 16.3m at 3,392ppm Li from 107m • 22.4m at 2,555ppm Li from 141m

These results highlight robust, albeit variable thickness across the ore body and robust grades within the mineralised ore, in our view.

The zinnwaldite concentrate to be produced is around 80% zinnwaldite and 20% quartz with a content of approximately 1.3% lithium metal. BCN is planning to produce lithium fluoride which is one of the most valuable end products currently traded at around US$22,000/t with primary uses including optics, organic and polymer LEDs, nuclear reactors and radiation detectors. BCN plan to sell the product to the local chemical industry in Germany.

The broad parameters of the PFS for which concentrator and roasting testwork have been completed are to produce 5ktpa of lithium fluoride (10ktpa LCE) with ore extraction of 500ktpa producing 132ktpa of mica concentrate at the mine site. Around 35ktpa of potassium sulphate is also expected to be produced as a by-product while tin and tantalum are also potential by-products. This concentrate will be transported 120km to Schwarzheide for pyro and hydrometallurgical processing. This phase of the workstream is the focus of the study currently including the metallurgical testwork, mine design and engineering.

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Valuation

Our valuation of Bacanora Lithium (BCN LN) is based on a risked NAV for Sonora and peer based EV/t multiple for Zinnwald. With the potential for low cash costs, strong margins of 60%+ EBITDA and strong free cash flow generation we believe that the current market capitalisation deeply undervalues the asset potential. Any potential execution risk is heavily compensated at the current price and particularly, in our view, in light of the strengthening lithium fundamental backdrop. Furthermore, we believe that the current team has the necessary expertise to successfully deliver the project given its significant expertise in lithium production.

Our sum of the parts target price for BCN is 115p/sh. which implies 342% upside potential.

WACC Calculation

WACC calculation Target Debt to Asset Ratio 40% Target Equity to Asset Ratio 60% Risk Free Rate 2.0% Base Premium for EM 8% Beta 1.00 Country Specific Premium 0% Liquidity Risk 0% Corporate Governance 0% Total Cost of Equity 9.5%

Cost of Debt Calculation Cost of Debt 9.0% Tax Rate (Mexico) 30% Cost of Debt (Net of Tax) 6.3% WACC 8.2% SOURCE: Company data, VSA Capital Research.

Our calculations yield a WACC of 8.2% for BCN. We calculate an 9.5% cost of equity and our cost of debt assumption is based on outstanding debt which charges interest at LIBOR plus 8%. Therefore, our NAV-based valuation approach is based on a discount rate of 8.2% and we use a P/NAV multiple of 0.6x to reflect execution risk. We use an FX rate of USDGBP 0.73. Our NAV is based on attributable earnings to BCN assuming that the ownership of the concessions remain unchanged unlike the DFS which is an overall project evaluation.

Determining a relative valuation for BCN is challenging, in our view. Since the hard rock spodumene concentrate producers do not and do not intend to produce the battery grade end product and therefore have a different economic model and significantly lower direct exposure to the lithium ion battery market. There are only a handful of developers such as Nemaska Lithium (NMC CN) which intend to produce a battery grade product. Meanwhile the production lead time for brine producers using the evaporation process has meant that brine developers trade at a significant discount to hard rock developers where production is far quicker; clearly this is inappropriate for BCN also. Therefor we feel it is appropriate to value Sonora based only its project NAV.

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Bacanora Lithium NAV Valuation (Sonora)

Division Attributable NAV, USD’000 P/NAV Fair Equity Value (US$m) Fair Equity Value (£m) Sonora 935 0.6 561 410 Consolidated Net Debt 12 9 Total Equity Value 602 419 SOURCE: Company data, VSA Capital Research.

Based on current stage two capacity of 35ktpa, BCN is set to use just 7% of the resource in the initial 20 year mine life. Therefore, in order to better reflect the value of this significant resource we have applied a terminal value to our NPV using a terminal growth rate of 2%. Given the relative contribution of the mining costs to overall operating cost we believe that this is an appropriate methodology as the impact of variations in grade is moderated by the low contribution of mining costs.

Given the imminent project financing we have assumed that equity funding is raised at a price of 50p, although this is merely an estimate, implying an additional 248m shares and our target price is therefore calculated on a fully diluted basis.

Valuation Summary

US$m £m p/sh.

NAV Fair Value Sonora 561 410 107 Zinnwald Target, EV/t 138 Zinnwald Fair Value, US$m (50%) 52 38 10 No. of shares outstanding 134,464,864 No. of shares to be issued (assumed £170m at 60p) 248,200,000 Blended 12-mo Target Price, /sh. 115 Current Price, p/sh. 26 Upside, % 342% SOURCE: Company data, VSA Capital Research.

Multiple-Based Valuation (Zinnwald)

We believe that the pullback in lithium equities this year has left the sector deeply undervalued and therefore we believe that there is significant potential for a rerating of resource valuations as a whole. However, with a current market capitalisation of £35m, the current relative valuation demonstrates that BCN is undervalued as a whole and for its Zinnwald project alone. We use a peer group based on other hard rock producers to determine our relative multiple of US$138/t for Zinnwald which results in an EV of £38m. Risks

• Commodity Prices. The company is primarily exposed to the lithium market and unexpected changes to commodity prices are likely to affect our valuation.

• Political Risk. Changes to the current political regime and mining code in Mexico would potentially alter the risk profile and the ability of the company to deliver on its development schedule. Unfavourable changes regarding capital restrictions represent a further risk.

• Macro Risk. Unexpected moves in the MXNUSD may impact the company.

• Execution Risk. The potential for delays and operating issues are an inherent industry risk, this may include delays in receiving financing or hold ups to the completion of development milestones.

• Financing Risk. Access to financing is a perennial risk for junior natural resources companies.

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Peer Group Comparison

Company Name Ticker M'Cap US$m EV, US$m Country Resource, M&I, LCE, mnt Grade Resource, Inferred, LCE, mnt Grade EV/t (US$, M&I & I) Hard Rock

Nemaska Lithium NMX CN 464 339 Canada 1.4 1.5% 0.2 1.4% 211 Critical Elements CRE CN 93 89 Canada 0.7 0.9% 0.1 0.8% 112 Savannah Resources SAV LN 61 60 Portugal 0.3 1.1% 0.3 1.1% 115 Kidman Resources KDR LN 397 391 Australia 6.6 1.5% 0.5 1.1% 113 Prospect Resources PSC AU 35 26 Zimbabwe 1.7 1.1% 0.3 1.1% 13 European Metals EMH AU 37 33 Czech Republic 3.7 0.4% 3.1 0.8% 5 Birimian BGS AU 34 29 Mali 1.6 1.5% 2.0 1.3% 8 European Lithium EUR AU 46 42 Austria 0.2 1.2% 0.1 0.8% 155

Brines mg/l Li mg/l Li mg/l Li

Millennial Lithium ML CN 87 41 Argentina 2.1 445 0.9 469 14 Advantage Lithium AAL CN 63 54 Argentina, US - - 3.0 450 18 Neo Lithium NLC CN 60 24 Argentina 0.8 753 0.8 567 16 Lake Resources# LKE AU 23 23 Argentina 1.0 289 3.4 209 5 Lithium Americas* LAC CN 324 241 Argentina 16.4 712 - - 13 Soft Rock

Thacker Pass (LAC) 6.0 0.6% 2.30 0.6% Ioneer INR AU 191 191 USA 2.9 0.3% 1.1 0.3% 47 Bacanora Minerals BCN LN 44 55 Mexico / Germany 5.0 0.7% 3.8 0.6% 5

Zinnwald (50%) 0.5 0.8% 0.2 0.8% *Inclusive of Reserves #Indicates VSA Capital Coverage SOURCE: Company data, FactSet, VSA Capital Research.

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Electric Vehicles & Battery Demand Rising Penetration Underpinned by Government Policy

During 2017 the battery and electric vehicle (EV) markets received a significant increase in attention as governments in Western Europe set out targets to completely eradicate internal combustion engines from their roads. This strong momentum has carried through into 2018. France and the UK committed to banning the sale of petrol and diesel cars by 2040 in response to the emissions scandal and the revelation over the negative effects of diesel emissions, particularly in relation to urban air quality. India has also committed to banning petrol and diesel engines by 2030.

Global EV sales currently account for just 1% of global automobile sales with only 10 countries accounting for 95% of global sales. China is the market leader with more than 50% of new sales and has been championing the sector for a number of years. With governments underpinning demand through legislation and major markets like India, which currently accounts for 0.1% of demand, starting to aggressively electrify their fleets we believe the outlook for demand growth is strong.

The China Association of Automobile Manufacturers (CAAM) is targeting a 12% share for electric vehicles by 2020 and 20% by 2025. China EV sales of 765k units YTD in 2018 are up 93% YoY. Meanwhile in the US, the 200k units sold in 2017 accounted for 1.7% of the market although growth at 24% YoY was slower than the 37% YoY achieved in the prior year. In 2018 Tesla’s (TSLA US) Model 3 has become the most popular luxury car across the country with 56k units delivered in Q3 2018. Bloomberg New Energy Finance (BNEF) expects 50% of new car sales globally to be electric by 2040 with the total fleet being one third electric by that point. BNEF estimates are relatively conservative compared to some in the market although they have been adopted by major energy companies such as Shell (RDSA LN) and the implied growth from these figures alone indicates a fundamental shift.

The improving economics of EVs have played a key role in the uptick in demand notably the significant reduction in battery costs (down 24% YoY in 2017 and 80% since 2010 according to Bloomberg) and improving vehicle range. Currently EVs are heavily subsidised while vehicle range and charging times are constantly at the forefront of consumer’s minds; in the UK, grants of up to £4,500 are available for purchasing approved EV models whilst in China subsidies of up to RMB110,000/unit, however, we are encouraged by the proactive approach the UK government is taking. For example, subsidies were recently changed to exclude vehicles if the range was less than 150km and ha ve been increased for those above 400km demonstrating a proactive policy in line with the needs of consumers.

China Electric Vehicle Sales Continue to Grow Strongly

140,000 600% China EV Sales YoY Growth, % 120,000 500%

100,000 400%

80,000 300%

60,000 200%

40,000 100%

20,000 0%

0 -100%

Jul-15 Jul-16 Jul-17 Jul-18

Jan-16 Jan-17 Jan-15 Jan-18

Oct-15 Oct-17 Oct-18 Oct-16

Apr-15 Apr-17 Apr-18 Apr-16

SOURCE: Company data, VSA Capital Research.

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Two key factors will determine the speed of uptake of EVs, in our view; the role out of the required infrastructure and the pace of technological advance and its impact on EV economics. As we have highlighted, subsidies currently are crucial to incentivising consumers to choosing EVs over traditional vehicles. Ultimately these must be reversed for the industry to stand on its own and given the trajectory of battery costs and rapid growth in sales this is unlikely to be an issue, in our view. The reversal of subsidies that comes with the commercialisation and broad uptake of electric vehicles leaves governments with a conundrum as they will have to replace fuel duty revenue as petrol and diesel are phased out; in the UK fuel duty revenue is projected at £27.5bn in 2017-18.

The commitment to EVs necessitates investment in charging infrastructure. This is an area in which governments are perhaps best placed to assist as they can lead in providing investment support as well as providing regulation to prevent heterogeneous charging points being developed. The State Grid Corporation of China announced earlier this year that it plans to build 120,000 public charging stations by 2020; there are currently around 90,000 petrol stations across China. This highlights the commitment to the pivot towards EVs and we therefore believe the demand outlook is incredibly strong and battery materials have a key role to play in the roll out of development. Lithium Market Overview

The rapid growth of the lithium market has been driven by a surge in demand for lithium-ion batteries, primarily driven by the growth of the electric vehicle market in China where sales have increased dramatically again in 2018 after surging growth in the past three years. In order to meet rising demand, battery manufacturers have commissioned additional manufacturing capacity often termed mega-factories. The most well-known of these is the Tesla (TSLA US) gigafactory in Nevada, which we anticipate to require around 25-30ktpa of lithium carbonate equivalent demand to meet its 500,000 battery pack annual capacity. However, China is the largest single consumer with far more significant battery manufacturing capacity being built and currently accounting for around 35% of global demand which we estimate reached c210ktpa LCE in 2017 and according to SQM (SQM US) has grown a further 25% YoY in 2018.

Lithium Carbonate Price, Contract US$/t

20,000 LCE price, US$/t

15,000

10,000

5,000

0 2005A 2007A 2009A 2011A 2013A 2015A 2017A

SOURCE: Company data, VSA Capital Research.

From a handful of such factories in 2015 the pipeline capacity for battery manufacturing now stands at 1,147.5GWh and major producers such as FMC and SQM now planning for 1mntpa annual consumption by 2025. As a result, prices of lithium carbonate have risen sharply from around US$6,000/t in 2015 to US$16,500/t in Q3 2018 according to SQM’s contract pricing, as a shortage of battery grade lithium carbonate remains despite an increase in spodumene concentrate output.

On the carbonate front, moves to expand supply of the raw material for conversion have already begun albeit slowly. Production from brines may only be ramped up slowly as it is an evaporation process primarily; the trade-off being lower opex once operational. This has been highlighted by SQM’s announcements this year guiding that production

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capacity will be 70ktpa by year end, however, sales volumes guided originally to increase from 48ktpa in 2017 to just 55ktpa are now expected to be lower YoY at 45kt. Currently, production increases are largely reliant on hard rock spodumene concentrate production and subsequent conversion to lithium chemical products. Brine production expansions have also been heavily hampered by disputes between SQM and Albemarle (ABL US) over the use of water along with a royalty dispute between the Chilean government and ALB. This means that growth will now have to come from projects primarily outside of Chile which has been a major source of supply in recent years.

The pricing outlook therefore is robust, in our view, with strong demand growth and supply struggling to keep pace with that growth. We highlight that ALB has announced that it has secured pricing for 87% of its lithium carbonate output to 2020 with minimum pricing at 2018 levels and minimum purchase requirements also. We therefore remain bullish on the outlook for pricing over the long term.

VSA Capital Lithium Carbonate Price Forecast

2015A 2016A 2017A 2018 2019 2020 2021 2022 2023 2024 LT

6,500 7,400 13,900 16,500 17,000 17,500 18,000 17,000 16,000 15,000 14,000 SOURCE: Company data, VSA Capital Research.

European Catch Up Means Additional Demand Growth

The emissions scandal has focussed development plans for European car manufacturers who are adopting aggressive targets for electric vehicle production which include significant levels of vertical integration. Indeed, both Daimler and Volkswagen Group have committed to making 25% of their fleet electric by 2025 and recently committed US$40bn to electrifying their fleets, while Audi has made a strong commitment to EVs and has opted to source batteries from Samsung. Daimler have indicated that this would require 22GWh of battery manufacturing capacity and broke ground in May 2017 on a battery plant near Dresden which is expected to take 9-12 months to construct. Furthermore, Jaguar Land Rover in partnership with Ford and BMW have also indicated that they are considering building an integrated facility while Tesla (TSLA US) are reviewing sites for a potential European gigafactory.

As well as the integrated solutions proposed by the car manufacturers, existing suppliers such as LG Chem, Samsung and BMZ are rolling out plans to build European lithium-ion battery manufacturing capacity. Samsung, having purchased a facility from Magna Steyr in Austria are constructing a new facility in Hungary which would be able to supply batteries for 50k EVs per annum by late 2018. BMZ intend to expand their 15GWh of capacity to 30GWh by 2020. The largest potential addition comes from Northvolt, a Swedish company headed by a former Tesla executive which is seeking to raise US$4bn for a 32GWh plant, which would be one of the largest in the world.

The emergence of Europe as a centre of battery manufacturing capacity means the region is likely to become as important as China and the US, in our view. However, this additional centre of demand growth places greater uncertainty in terms of the security of lithium supply which is likely to become a key issue in the medium term as these facilities come online particularly given how Chinese producers have already moved to secure a number of offtakes with the most advanced projects globally. Chinese firms such as Tianqi and Ganfeng have already moved to secure long term offtakes with the leading Australian and South American projects. The EU and US have been slow to move on securing strategic supply of key battery materials which is likely to mean they will have to pay significantly higher transaction values to meet their needs.

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Supply Challenged to Keep Pace with Demand

The nature of lithium production means there are specific industry risks for lithium project developers which limit the ability of both incumbent producers and new entrants to rapidly increase production. As a result, we believe that market deficits are likely to be maintained in the short to medium term, providing support for lithium pricing in both carbonate and hydroxide markets.

Planned Production 2012-16, kt Actual Production 2012-16, kt

450 450

400 400

350 350

300 300

250 250

200 200

150 150

100 100

50 50

- - 2012 2016 2012 2016

SOURCE: Company data, VSA Capital Research.

Being highly reactive, lithium never occurs in metallic form in nature, but instead is most commonly found in its oxidised mineral and metal compounds, in two main forms:

• As brines from evaporate basins (dried up seas and salt lakes, as well as from some oil field brines and geothermal well fluids).

• In pegmatites, where the primary lithium minerals are lepidolite K(Li,Al,Rb) 3(Al,Si)4O10(F,OH)2 and spodumene LiAl(SiO3). Some high temperature, tin-tungsten ore bodies, called greisens, also produce by-product lithium.

• The third group to which BCN belongs are, lithium-bearing volcanic clays which are yet to be exploited on a commercial scale. The process is a derivative of hard rock processing and we believe that BCN has demonstrated the viability of this sourcerock.

Once identified, lithium is extracted using one of two methods and saleable products tend to be conversions of the mineral or brine liquor to one of lithium hydroxide (LiOH and LiOH-H2O), lithium nitride (Li3N), or lithium carbonate (Li2CO3). The production economics and benefits of brines versus hard rock deposits vary, depending on the size of the resource and its geographic/climatic location.

• Brine extraction itself is relatively simple, with the fluids pumped to the surface and distributed into large ponds. in order to slowly evaporate. This leaves the soluble salts, including lithium, which are then pumped, or mechanically loaded, to be treated in a chemical separation plant. Brines have lower production costs per tonne of product and longer mine lives, but can have variable production rates month-on-month and season-to-season, depending upon the weather. Brine operations also typically have larger pre-production capex requirements than pegmatite- based mines. They currently represent two-thirds of total world production.

• Lithium from pegmatites or greisens is extracted via mining and processed in a more conventional manner, through crushing and grinding, followed by chemical separation. Pegmatites have the advantage of predictable lithium compound production rates, an advantage when producing high spec product for batteries. However, operating costs tend to be higher than those of brine operations.

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Global Lithium Production, t

0 5000 10000 15000 20000 25000

2017

Chile

2016 Australia China Argentina 2015 Zimbabwe Portugal 2014 Brazil

2013

SOURCE: USGS, VSA Capital Research.

Strategic investors are now prepared to pay significant premiums for long term exposure to lithium due to the supply side developments over the last few months have demonstrated the vulnerability of the supply chain. Disputes in Chile over water usage which have arisen due to the intense demand for water from both copper miners and lithium producers means that a significant portion of Albemarle’s (ALB US) and SQM (SQM US) previously announced growth strategy is now under threat. ALB is also disputing with Chilean regulators the royalty regime. Indeed its expansion programmes have been severely hampered and allocation for ALB production has been capped at 64ktpa LCE over the next 27 years with a proposed 43.5ktpa expansion rejected.

This has prompted ALB to sign a US$1.2bn deal for a 50/50 JV in the Wodgina lithium mine in Western Australia with Mineral Resources (MIN AU). The mine will produce 750ktpa of 6% lithium spodumene concentrate to supply a 50ktpa lithium hydroxide plant. Hard rock spodumene production typically occupies the fourth quartile of the lithium cost curve once conversion costs are incorporated to produce final product and the recent shift towards higher cost production suggests that prices are likely to remain higher for longer.

Aside from longer term fundamentals highlighted by strategic acquisitions the near-term market balance has proven tighter than consensus although in line with our view. SQM having guided to a slight decline in pricing in H2 2018 recently declared broadly flat pricing in Q3 2018 and indicated support for prices in the balance of the year. This was due to strong demand which they expect to be up 25% YoY globally along with supply side disappointments. Having guided towards reaching capacity of 70ktpa by year end (albeit with a production lag) SQM cut guidance to 45kt for 2018, lower even than 48kt in 2017. We view SQM pricing as the sector benchmark currently and the fact that their pricing has remained elevated should highlight to investors that the market remains tight and the outlook firm.

The backdrop to recent supply side setbacks is continually strengthening demand, which with the announcements by Governments such as the UK and France to mandate a switch to EVs by 2040, is legally underwritten. New announcements regarding conventional carmakers transitioning to EVs appear with increasing regularity with the most significant recent statement being that of VW committing US$50bn to EV development and plans to build a dedicated plant in North America. Benchmark Mineral Intelligence have now identified a pipeline of 60 lithium ion maegafactories an increase to an estimated 1,147.5GWh of capacity by 2028, up from three megafactories in 2015, and the list is growing.

Consequently the recent increases in the supply of lithium have come from hard rock projects, primarily in Australia, although we note the recent successful project financing of Nemaska Lithium (NMX CN). However, this primarily means that lithium concentrate production has been increasing from projects such as Mt Catlin and Pilgangoora. This must then be converted to lithium chemical products for end use. The increase in hard rock production does mean that

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the cost curve in lithium carbonate terms is expected to increase with the marginal cost of production rising we believe that this supports prices in the longer term.

Lithium Carbonate Cost Curve 2017 Lithium Carbonate Cost Curve 2020

Current Carbonate Market Price Range ($11-16/kg) Current Carbonate Market Price Range ($11-16/kg)

EstimatedCost Cash

Estimated Cash Cost Estimated Cash

Estimated Total 2017 Demand Estimated2017 Total

Estimated Total 2020 Demand Estimated2020 Total

kMT

kMT 200 200 335

SOURCE: FMC, VSA Capital Research.

Over the longer term we do expect the extensive brine potential within China to be exploited. CRU Group believe 190ktpa of capacity may be forthcoming in the next five to 10 years from announced and quantified projects to date. Logistically, production is hampered by the brine basins being in the more remote areas of China and Mongolia which lack sufficient or extensive power and transport infrastructure and high levels of magnesium which currently makes these projects uneconomic. China’s One Belt One Road policy of expenditure over the coming five years is intended to debottleneck these regions and open them up to investment. However, whether this will be deemed a suitable source of supply for ethically minded EV manufacturers will remain to be seen given China’s track record and the European emissions scandal.

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Appendix 1: Key Personnel Mark Hohnen; Chairman, Executive Director

Mr. Hohnen has experience in the Japanese, Chinese and Korean markets, all of which play a significant role in the production of lithium ion batteries and the development of electric vehicle technology. Mr. Hohnen has been involved in the mineral resource sector since the late 1970s. He has had extensive international business experience in a wide range of industries including mining and exploration, property, investment, software and agriculture. He has held a number of directorships in both public and private companies and was founding Chairman of Cape Mentelle and Cloudy Bay wines, as well as being on the board of oil and coal company Anglo Pacific Resources Plc. Mr. Hohnen was also a director of Kalahari Minerals and Extract Resources, having successfully negotiated the sale of both companies to Taurus (CGN). He is also chairman of ASX listed, Boss Resources Limited and director of Salt Lake Potash Limited. Peter Secker; Chief Executive Officer, Executive Director

Mr. Secker is a mining engineer with over 35 years experience in the resources industry. During his career he has built and operated a number of mines and metallurgical processing facilities in Africa, Australia, China and Canada. His operating and project experience spans a number of commodities, including titanium, copper, iron ore, gold and lithium. For the past 15 years Peter has been Chief Executive of a number of publicly listed companies, most recently as CEO of companies developing gold mines in China and lithium mines in Canada and Mexico. Janet Boyce; Chief Financial Officer

Ms Boyce is a certified public accountant who has held a number of senior financial roles, including Group Chief Financial Officer and Executive Director of Gemfields plc. Ms Boyce was a member of the Gemfields executive management team between August 2013 and July 2017, playing a key role in the formulation and implementation of group strategy, overseeing the financial activities and managing investor relations.

Prior to Gemfields, Ms Boyce held a number of senior positions with ENRC Plc (August 2007 – July 2013), which at the time of her employment was a FTSE 100 mining and metals company. Her roles included: Group accounting methodology manager; Deputy Finance Controller; Corporate accounting manager and Group reporting manager. Previously Ms Boyce was part of the Audit and Assurance Services team at Ernst & Young LLP in London and PWC in the Philippines (2002 - 2007). Eileen Carr; Non-Executive Director

Over the course of her career, Ms Carr has been a key member of teams behind the development of a number of successful mining operations across the world, including the Freda Rebecca gold mine in Zimbabwe, the Ayanfuri gold mine in Ghana, the Kalsaka gold mine in Burkina Faso and the Angovia gold mine in Ivory Coast. She has served as Finance Director/ CFO for both private and public companies starting with Cluff Resources in 1993. She has since gone on to hold several executive directorships in the resource sector, including CFO at both AIM traded Monterrico Metals plc and Alexander Mining plc. She was also a Director at European Goldfields Inc, a TSX listed gold exploration company with operations in Romania. Ray Hodgkinson; Non Executive Director

Mr Hodgkinson was a Director of Bacanora from the time of incorporation (2008 until 2013) and was recently re- appointed as a Director. He has previously worked as an engineering consultant to Striker Exploration Corp. and Exoro Energy Inc. He has been an Independent Director of Westcore Energy Ltd. since March 2007 and a Director of Troy Energy Corp. since September 2009. He served as Chief Operating Officer of Aztek Energy Ltd. from June 1, 2006 to January 2010. He served as a Director of Tembo Gold Corp (formerly Lakota Resources Inc.) from October 2009 to July 15, 2011. He has 30 years of experience in the natural resources sector and is a Member of the Association of

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Professional Engineers and Geoscientists of Alberta. Mr. Hodgkinson received a Bachelor of Science Degree in Engineering from University of Calgary in June 1977. James Strauss; Non-Executive Director

Mr Strauss has had 30 years’ experience within the stockbroking and mining finance sector. Currently he is a Director of mining finance boutique, Strauss Partners Ltd - based in London, UK. Previously, a Managing Director at BMO Capital Markets, 2007 - 2009. He has raised in excess of $1bn for projects spanning the globe in both energy and mineral world on behalf of leading institutions in UK, Europe, North America and Australia. He is particularly well known for his long term specialisation of the Diamond Mining sector as well as supporting development assets through to production. Jamie is a Director of Altius Minerals and Gold Standard Ventures. Dr Andres Antonius; Non-Executive Director

Dr. Constantin Antonius Gonzalez (aged 47) is a Mexican national who has held positions in the Government of Mexico as well as in the private sector and academia. Dr. Antonius previously served as Undersecretary for Energy Policy and prior to that was a staff member at the Agriculture Secretariat. Dr. Antonius also held the role of coordinator for strategy of then President Elect Peña Nieto's transition team in 2012. Dr. Antonius is currently CEO of Plan B, a provider of strategic advice to a range of clients. Prior to founding Plan B, he was the President of the Consulting Services Group at Kroll, a world leader in risk management, business intelligence, and investigations. Dr. Antonius has also held the position of Director of Strategic Planning at the Instituto Tecnológico Autónomo de México ('ITAM') and has taught economic theory, game theory, and crisis management at both the ITAM and the Universidad Iberoamericana. He received a B.A., Masters and PhD degree in Economics from Harvard University. Junichi Tomono; Non-Executive Director

Mr Tomono (aged 43) has over 22 years' experience with Hanwa, during which time he has worked in the Metals, Chemicals, Alloys, Scrap metals and Mining divisions. Mr. Tomono has a special focus on the battery chemicals sector including lithium. As head of the Speciality Metals and Alloys department and as a Director of three of Hanwa's subsidiaries, Mr. Tomono has played a key role in Hanwa adopting a more global focus in response to the rapid growth in the lithium battery sector. Derek Batorowski; Non-Executive Director

Over twenty years of experience in the oil and gas and mineral exploration industries. Experienced in accounting, finance, corporate planning, treasury, and taxation with both public and private large and small oil and gas producers and small cap national and international mineral exploration companies. Cherif Rifaat; Company Secretary

Mr Rifaat is a UK Chartered Accountant who qualified with KPMG and has more than 20 years’ experience in a number of Industries, including mining, IT, real estate and telecommunications. He has been involved with Bacanora since it originally listed on AIM in July 2014, assisting in the preparation of the Group’s Feasibility Studies and the Group's long term tax and financial structuring. He serves as CFO and director of Erris Resources Plc. Eric Carter; Project Director

Mr Carter has over 22 years of lithium carbonate production expertise with FMC in North America, with extensive experience of lithium hydroxide and lithium metal process operations. He has designed, built and operated plants producing spodumene, lithium carbonate and lithium metal in North and Central America.

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Gaspar Mendez; Project Manager

Mr Mendez has 20 years’ experience in the mining industry, with a successful track record in the development and operation of several gold projects in Mexico. He is a certified Project Management Professional and has a Master’s degree in Business Administration and a Bachelor’s degree in Chemical Engineering. Edil Torres; EPC Manager

Mr Torres has over 30 yers of engineering nd construction experience in the pharmaceutical, chemical, energy and nuclear sectors. He is a recognised expert in EPC/EPCM Project Delivery Method having devoted the majority of his career to Mexico and Latin America as construction Director for a multinational engineering firm.

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Appendix 2: Financial Statements

Profit and Loss (US$’000), June Year End

2017A 2018A

General and administrative (3,813) (7,379) Warrant liability valuation 263 - Depreciation (139) (150) Share based payment expense (2,484) (1,877) Foreign exchange loss (1,791) (763) Impairment of exploration and evaluation (6,191) (559) Joint venture investment (loss)/profit 37 (147) Accretion of joint venture obligation (303) (662) Loss on derivative asset - (1,521) EBIT (14,421) (13,059)

Finance Income 83 213 Finance costs - - Net finance costs 83 213

Profit before taxation (14,338) (12,846) Mining and income tax - 61

Profit for the year (14,338) (12,786) Non controlling interest 2 (55) Attributable to equity holders of the company (14,340) (12,731) SOURCE: Company data, VSA Capital Research.

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Balance Sheet (US$’000), June Year End

2017A 2018A

Non-current assets Investment in joint venture 8,419 8,426 Derivtive asset 2,069 615 Property, plant and equipment 1,702 26,391 Exploration and evaluation assets 14,318 503 Total non-current assets 26,507 35,936

Current assets Other Receivables 540 1,472 Cash and bank balances 29,890 13,203 Total current assets 30,430 14,675 Total assets 56,936 50,611

Equity and liabilities Capital and reserves Share capital 70,268 18,958 Share premium - 141 Merger reserve - 53,557 Share based payment reserve 5,043 6,138 Foreign currency transalation reserve 2,682 3,568 Retained earnings (26,298) (39,029) Non controlling Interest (644) (698) Total equity 51,052 42,635

Non-current liabilities Joint venture obligation 1,487 - Deferred tax liability 104 - Total non-current liabilities 1,591 -

Current liabilities Joint venture obligation 3,451 1,592 Trade and other payables 843 6,384 Total current liabilities 4,294 7,975 Total liabilities 5,885 7,975 Total equity and liabilities 56,936 50,611 SOURCE: Company data, VSA Capital Research.

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Statement of Cash Flows (US$’000), June Year End

2017A 2018A

Cash Flows From Operating Activities Net income (14,338) (12,846) Adjustments for: Warrant liability revaluation (263) - Depreciation 139 150 Share based payments expense 2,484 1,877 Foreign exchange - 763 Impairment of exploration & evaluation assets 6,191 559 Loss on disposal of PPE - 51 Loss/(gain) on investment in joint venture (37) 147 Accretion of joint venture obligation 303 662 Loss on derivative asset - 1,521 Working capital Decrease in trade and other payables 39 1,758 Other receivables (310) (932) Deferred costs 60 - Change in working capital (211) 826 Interest received (72) (199) Taxes paid - (42) Net cash generated by operating activities (5,803) (6,530)

Cash flows from investing activities Interest received 72 199 Purchase of property, plant and equipment (422) (5,080) Purchase of exploration and evaluation assets (6,003) (2,774) Investment in joint venture (5,422) - Payments of joint venture obligation - (4,177) Net cash (used in)/generated by investing activities (11,775) (11,833)

Cash flows from financing activities - - Issues of share capital 22,269 - Exercis of options 46 1,303 Exercise of warrants 3,013 302 Net cash used in financing activities 25,327 1,606

Net increase in cash and cash equivalents 7,802 (16,687)

Effects of exchange rate changes on the balance of cash held in foreign currencies 53 70 Cash and cash equivalents at the beginning of the year 22,088 29,890 Cash and cash equivalents at the end of the year 29,890 13,203 SOURCE: Company data, VSA Capital Research.

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Disclaimer

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In any case. ratings (or research) should not be used or relied upon as investment advice. An investor’s decision to buy or sell a stock or investment fund should depend on individual circumstances and other considerations. VSA Capital Limited’s recommendations are defined as follows: BUY: The stock is expected to increase by in excess of 10% in absolute terms over the next twelve months. HOLD: The price of the stock is expected to move in a range between -10% and +10% in absolute terms over the next twelve months. SELL: The stock is expected to decrease by in excess of 10% in absolute terms over the next twelve months. In addition. on occasion. if the stock has the potential to increase by in excess of 10%. but on qualitative grounds rather than quantitative. a SPECULATIVE BUY may be used.

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Distribution of VSA Capital Limited’s Equities Recommendations VSA Capital Limited must disclose in each research report the percentage of all securities rated by the member to which the member would assign a “BUY”. “HOLD. or “SELL” rating. and also the proportion of relevant investments in each category issued by the issuers to which the firm supplied investment banking services during the previous twelve months. The said ratings are updated on a quarterly basis. Recommendation and Target Price History

Valuation basis Our valuation is derived from a risked NPV calculation and peer group EV/t in situ resource value. Risks to that valuation Commodity prices, political risk, execution risk, financing risk. This recommendation was first published on 13 December 2018.

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