This UK lithium stock could jump. Here’s why

Last week these UK lithium shares jumped, but Christopher Ruane sees further potential upside. Here he explains why and what he plans to do.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Lithium has been a popular investment theme in recent months. Many investors see potential in the growing electric vehicle battery market to drive demand for lithium. That helps explain the renewed interest in UK lithium shares.

One UK lithium share leapt last week. I still think its share price could jump further. But I won’t be buying the shares for my investment portfolio. I explain why below.

Bacanora Lithium investment case 

Bacanora Lithium (LSE: BCN) is a mining company. Its key asset is its part of a lithium mining development in Sonora, Mexico.

Sonora’s high mineral grade and scaleable nature form part of the project’s appeal. I have previously discussed the company and what I saw as the pros and cons of its investment case.

But the mine is not yet in production. That makes it hard for me as an investor to assess its long-term production potential with confidence. Unless I feel quite confident assessing a company’s long-term prospects, it won’t meet the investment criteria for my portfolio.

Why the Bacanora Lithium share price jumped

The largest shareholder in Bacanora is Chinese lithium giant Ganfeng Lithium. Last week it was announced that Ganfeng may make a bid for the shares of Bacanora it does not own.

The indicative price was 67.5p per share. But in Monday trading these UK lithium shares are around 57p. That suggests that even now there is the chance to generate an 18% return in a matter of months if the Ganfeng bid goes ahead.

No bid yet for these UK lithium shares

A key point to note is that Ganfeng has not actually made a bid yet.

It plans to do so if certain conditions are met. For example, the Chinese company needs to get the right approvals from regulators in its home market. That process could take months.

At the moment there is no particular reason to expect that the bid won’t materialise. After all, Ganfeng already effectively owns almost 30% of Bacanora. Clearly it sees value in the company.

However, that is not a guarantee a bid will emerge. There could be regulatory hurdles, for example. The Bacanora board could reject an approach. So there is a risk that no successful bid will emerge.

Impact for the Bacanora share price

The Bacanora Lithium share price today is around a third higher than it was early last week. But a sizeable gap remains between the current price and prospective bid level.

However, I see risks to buying now in anticipation of a takeover. I think Sonora is an attractive asset due to its projected lithium output and cost basis. But the current share price clearly factors in expectation of a bid. Last week’s jump makes me think the current Bacanora Lithium share price is not solely related to its underlying fundamentals.

What if a bid doesn’t arrive, or is rejected? I think the price of these UK lithium shares could fall again.

My next step for these UK lithium shares

Previously I was waiting to see how the Sonora development proceeded. Until then I felt the Bacanora Lithium share price was too speculative to meet my investment criteria.

The possible bid caught my attention. But it hasn’t shifted me from my original analytical perspective as an investor.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

christopherruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

US Stock

The Nvidia share price falls! Here’s what I think happens next for the S&P 500

Jon Smith reviews the overnight results from Nvidia and explains why this could stall the S&P 500 performance through to…

Read more »

Investing Articles

Down 15% today, is this FTSE 100 share too cheap for me to miss?

JD Sports' share price has tanked after the FTSE 100 share released another profit warning. Is this the opportunity I've…

Read more »

Investing Articles

Up 8% today, is this FTSE 100 growth stock a slam-dunk buy for me?

Halma's share price is soaring thanks to another headline-grabbing trading update. Is the FTSE 100 stock now too good for…

Read more »

Investing Articles

With a P/E ratio of just 10.5 is now a brilliant time to buy a cut-price FTSE 250 tracker?

Harvey Jones says a recent dip in the FTSE 250 leaves the index trading at bargain levels. One stock in…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

To build a passive income flow, I’d follow this Warren Buffett approach

Warren Buffett has set up passive income streams most people can only dream about. Our writer sees some practical lessons…

Read more »

Growth Shares

As the boohoo share price falls, could it become a penny stock in 2025?

Jon Smith outlines some of the recent problems involving the boohoo share price and considers if things could get even…

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

Here are the worst-performing FTSE 100 shares over the last 5 years

These five FTSE 100 shares have been complete duds over the last half decade. But is there potential for a…

Read more »

Investing Articles

Nvidia stock has tripled this year! Can it keep rising?

Nvidia's latest sales update showed strong growth and the stock's been on a tear so far in 2024. So is…

Read more »