Bacanora Lithium plc ("Bacanora" or the "Company")

Annual Report and Financial Statements

31 December 2020

Bacanora Lithium Plc (AIM: BCN), a lithium development company, is pleased to provide its audited annual financial results for the year ended 31 December 2020. Where applicable, the Company's Annual Report will be posted to shareholders shortly and will be available electronically on the Company's website.

Highlights - for the twelve months ended 31 December 2020 and subsequent events:

Corporate - Completion of Company's 50% share of the funding requirements of the Sonora Lithium Project ("Sonora Project" or "Project"), Mexico

·      Bacanora Lithium plc ("Bacanora" or the "Company"), on 8 February 2021, completed a successful placing and retail offer which raised gross proceeds of approximately US$65.0 million through the issue of a total of 106,995,885 new ordinary shares at a price of 45 pence per placing share (£48.1 million). Together with the undrawn RK Mine Finance ("RK")  facility and cash on the Company's balance sheet, the gross proceeds will meet the Company's 50% share of the financing required for the construction of stage 1 of its flagship Sonora Project, located in Mexico.

·      In addition to the placing and retail offer, Ganfeng Lithium Co., Ltd. ("Ganfeng"), Bacanora's cornerstone investor and offtake partner, received board approval on 5 February 2021 to exercise its pre-emptive right at the placing price and to increase its holding in the Company. Ganfeng will subscribe for a total of 53,333,333 new ordinary shares at the placing price of 45 pence per share, representing gross proceeds £24.0 million. Completion of this investment from Ganfeng is conditional upon obtaining certain approvals and consents from authorities in the People's Republic of China. On completion of their investment, Bacanora will have 384,144,901 shares in issue and Ganfeng will have an ownership level of 28.88%.

·      Ganfeng completed its option to increase its stake in Sonora Lithium Ltd ("SLL") from 22.5% to 50% (the "Option") on 26 February 2021. SLL is the operational holding company for the Sonora Project. Consequently, Ganfeng have subscribed for 73,955,680 new ordinary shares in SLL at 29.59 pence at a total value of £21.9 million. On completion of the transaction, a revised Joint Venture Agreement ("JVA") came into force, whereby each party is responsible for their portion of Project capex.

·      These additional investments demonstrate Ganfeng's ongoing commitment to the Project, which targets production in 2023. Bacanora will remain as the project operator in Sonora, while Ganfeng will be responsible for leading certain engineering, procurement and construction ("EPC") activities including the battery-grade lithium hydrometallurgical plant.

·      Bacanora and its subsidiaries (the "Group") has a strong cash balance which was US$39.2 million as at 31 December 2020.

Sonora Project - work focused on finalising engineering processes allowing construction activities to commence on completion of the financing package.

·      Whilst COVID-19 has impacted the Company and its partners, work to complete the front-end engineering design ("FEED") has continued throughout the period, with GR Engineering Services ("GRES") completing the front-end concentrator and mechanical engineering and Ganfeng completing its flow sheet design testwork for the production of battery-grade lithium from the samples provided by the pilot plant.

·      Ganfeng is continuing to integrate its flow sheet for the production of battery-grade lithium into the overall large scale design and remains on schedule to deliver its final engineering packages to Bacanora in Q2 2021. Ganfeng continues to work with its equipment suppliers to determine equipment delivery times to align with a target of first production in 2023.

·      In Q1 2021, the Company commenced initial site activities for the development of the Sonora Project. Initial works involve the rescue and removal of surface vegetation and topsoil in the area required for the construction of the lithium processing plant. The Sonora construction team also commenced preparatory work to upgrade the main access road to the site in preparation for providing access for heavy equipment for commencing bulk site earthworks later in the year.

Zinnwald Lithium Project, Germany ("Zinnwald") - Bacanora secured the future of the joint venture and completed the sale of Deutsche Lithium GmbH ("DL") to Zinnwald Lithium Plc ("ZNWD") which was formerly known as Erris Resources Plc ("Erris").

·      The Company completed the sale (the "Zinnwald Transaction") of Bacanora's 50% shareholding of DL, on 29 October 2020, to AIM-listed Erris Resources Plc, now renamed Zinnwald Lithium Plc. ZNWD was re-admitted to AIM as the acquisition constituted a reverse takeover under AIM rules for ZNWD. Bacanora contributed its 50% investment in DL and €1.35 million cash. This cash was used to settle the commitment under the second supplemental joint venture agreement with SolarWorld AG and to pay for a portion of the transaction costs. Erris contributed its remaining cash and its Irish zinc and Swedish gold assets. In exchange, Bacanora received 90,619,170 shares or a 44.3% holding in ZNWD and a 2% net profit royalty.

Peter Secker, CEO of Bacanora, commented:

"Bacanora is one of London's very few listed pure-play lithium development companies. It recently fulfilled a long-standing objective, completing its share of the funding required to commence construction at our world-class Sonora Lithium Project in Mexico in 2021, bringing the Project and Company closer to achieving the goal of monetising its lithium resources by 2023. This was accomplished alongside a strengthening lithium price as a result of attractive demand side fundamentals driven by the EV market.

The Company's cornerstone investor and offtake partner, Ganfeng, entered into a new JV agreement at the operational holding company level of the Sonora Lithium Project in February 2021, increasing its stake to 50%. At the same time, Bacanora successfully completed a US$65 million fundraise, which provided the last element of the Company's 50% share of the financing required to bring Stage 1 into production. In addition, Ganfeng agreed to exercise its pre-emptive right to increase its holding in the Company to approximately 28.9%, representing gross proceeds of a further £24 million, subject to the Chinese government approval process. The combined total of the fundraising proceeds, the undrawn RK facility and cash on the Company's balance sheet, will more than meet Bacanora's share of the construction funding and projected working capital requirements to construct and commission Sonora in 2023.

It is not possible to review the year without acknowledging COVID-19. This global pandemic has impacted almost all aspects of the planet and the development of a mineral deposit is no exception. Weathering this storm and maintaining our strong cash position has been a testament to the team and our strategic partners.

Fortunately, Bacanora was able to supply its engineering partners with the required samples to progress the FEED during a period of lighter COVID-19 restrictions in the Hermosillo area. GRES completed its concentrator design work and Ganfeng completed its flow sheet design from samples provided by the pilot plant for the hydrometallurgical plant. These results are being integrated into the final engineering packages which Ganfeng will continue to deliver to Bacanora in Q2, 2021. Detailed engineering and vendor equipment pricing is now underway and current development schedules indicate project construction commencing in H2, 2021.

As the Sonora Project transitions into its development phase and activity on site increases, the Company's health and safety practices become more important than ever. Bacanora will continue to operate and benchmark itself against international reporting standards, alongside working closely with local communities and stakeholders. We are grateful for their ongoing support, alongside the Sonora State government and the Federal government of  Mexico, and by remaining transparent throughout this crucial development phase we hope this continues. As part of this transparency, we are pleased to share our first Corporate Governance and Sustainability Committee Report, which lays out the Company's key Environmental, Social and Corporate Governance initiatives and deliverables. This will be followed by a Sustainability report later in 2021. As we extract a critical mineral for a green energy future, we sincerely wish to protect the planet, not exacerbate existing problems.

Overall, I am delighted to report that Sonora has made the transition to the next development phase and I look forward to updating the market with further progress of works on site as we strive to capitalise on the fast-growing lithium market and transforming the Sonora Project into a lithium producer in 2023."

For further information please visit www.bacanoralithium.com or contact:

Notes to editors

Bacanora Lithium Plc is an AIM-listed (ticker 'BCN') lithium development company. The Company is focused on building, in collaboration with its major shareholder and offtake partner, Ganfeng Lithium (the world's largest lithium metals producer), a 35,000 tonne per annum open pit lithium carbonate operation at its flagship asset, the Sonora Lithium Project in Mexico. The Sonora Lithium Project has 8.8 million tonnes of lithium carbonate (Li₂CO₃) equivalent resources, with an approximate 250-year resource life, as detailed in its December 2017 Feasibility Study.

Sonora Lithium Ltd ("SLL") is the operational holding company for the Sonora Lithium Project and owns 100% of the La Ventana concession. The La Ventana concession accounts for 88% of the mined ore feed in the Sonora Feasibility Study which covers the initial 19 years of the project mine life.  On completion of this option exercise, SLL is now owned 50% by Bacanora and 50% by Ganfeng Lithium Co., Ltd. SLL also owns 70% of the El Sauz and Fleur concessions. 

Bacanora also owns 44.3% of Zinnwald Lithium Plc (AIM: ZNWD), which in turn owns a 50% interest in the Zinnwald Lithium Project and the Falkenhain and Altenberg Licences in southern Saxony, Germany.

Cautionary Statement Regarding Forward-Looking Information

Except for statements of historical fact, this news release contains certain "forward-looking information" within the meaning of applicable securities law. Forward-looking information is frequently characterized by words such as "plan", "expect", "project", "intend", "believe", "anticipate", "estimate" and other similar words, or statements that certain events or conditions "may" or "will" occur.  Although we believe that the expectations reflected in the forward-looking information are reasonable, there can be no assurance that such expectations will prove to be correct. We cannot guarantee future results, performance or achievements. Consequently, there is no representation that the actual results achieved will be the same, in whole or in part, as those set out in the forward-looking information.

Forward-looking information is based on the opinions and estimates of management at the date the statements are made, and are subject to a variety of risks and uncertainties and other factors that could cause actual events or results to differ materially from those anticipated in the forward-looking information. Some of the risks and other factors that could cause the results to differ materially from those expressed in the forward-looking information include, but are not limited to: commodity price volatility; general economic conditions in the UK, the United States, Mexico, Germany and globally; industry conditions, governmental regulation, including environmental regulation; unanticipated operating events or performance; failure to obtain industry partner and other third party consents and approvals, if and when required; the availability of capital on acceptable terms; the need to obtain required approvals from regulatory authorities; stock market volatility; competition for, among other things, capital, skilled personnel and supplies; changes in tax laws; and the other risk factors disclosed under our profile on SEDAR at www.sedar.com. Readers are cautioned that this list of risk factors should not be construed as exhaustive.

The forward-looking information contained in this news release is expressly qualified by this cautionary statement. We undertake no duty to update any of the forward-looking information to conform such information to actual results or to changes in our expectations except as otherwise required by applicable securities legislation. Readers are cautioned not to place undue reliance on forward-looking information.

Important notice

This announcement contains inside information for the purposes of the UK Market Abuse Regulation. The contents of this announcement have been prepared by and are the sole responsibility of Bacanora.

Chairman Statement

I am very pleased to be writing this annual shareholder letter following the recent US$65 million equity fundraise which occurred post the financial year end. This financing marks a pivotal moment in Bacanora's history and, along with the Company's conditional debt facility and existing cash, completes the Company's share of the funding requirement to finance the construction and operation of our flagship Sonora Lithium Project, located in Mexico. This achievement brings a new and exciting chapter for the Company and provides a clear route to becoming a producer of high value lithium products in 2023.

Our partner in our world-class Sonora Project, Ganfeng, has continued to support the Project, not only as a significant shareholder, but also as a joint venture partner. Ganfeng have re-iterated their commitment to the Project by increasing their stake in SLL to 50% and exercising their pre-emptive right to increase their holding in Bacanora to 28.88%, which is awaiting necessary approvals from the Chinese government. Ganfeng is the largest global lithium metals producer in the world and their support is a testament to the quality of the Project. Importantly, Ganfeng's contribution to the Sonora Project has not been solely monetary. Ganfeng will lead the engineering and procurement activities for the battery grade lithium hydrometallurgical processing plant. Since becoming a cornerstone investor in October 2019, their expertise in lithium battery componentry and construction has been critical for the metallurgical testwork. Throughout this process, Bacanora has continued to supply Ganfeng with ore samples from Sonora for modelling and optimisation of the process design ahead of the eventual commercial volumes in 2023.

These events, alongside those accomplished during the period, were realised against a backdrop of the unprecedented global pandemic of COVID-19. The pandemic presented many challenges not least the restrictions on international travel. I would like to commend our team and our partners in being able to continue the critical workstreams required to advance the engineering design work and execute the final financing for the Project. In particular, I would like to commend our teams and partners in Mexico and China in implementing the rigorous safety protocols and social distancing measures, to ensure the health and safety of our employees and communities.

One of the longer-term impacts of COVID-19 has been to accelerate green strategies across the globe as evidenced in 2020 with annual global sales of over 3.2 million battery electric vehicles and plug-in hybrid vehicles (collectively "EV"), a 43% increase in global sales over 2019¹. Governments, EV manufacturers and consumers are also responding swiftly to reduce greenhouse gas ("GHG") emissions and reach stated carbon neutrality targets by 2050 or earlier². Accordingly, materials that will facilitate the green transition, such as lithium, have come under the spotlight. This energy transition is clearly here to stay, and our Sonora Project has an exciting and important role to play in meeting this future demand for low carbon mobility and energy storage.

As Bacanora moves into construction and closer to operations, our Environmental, Social and Corporate Governance ("ESG") principles will benchmark our achievements against the industry's highest standards. Our Board makes this commitment so that we can contribute to the low carbon future of the automotive industry and renewable energy power grid whilst operating in a sustainable manner. We will continue to embed our sustainability philosophy across our operations, and I look forward to presenting our first Sustainability report later this year with updates on ESG developments with our stakeholders and enacting our ESG policies and management plans on-site.

I want to express sincere thanks to the Board, our management team and all our employees for their continued dedication and hard work during a challenging year. The Sonora government has been generous in its assistance and I would like to thank them for their continued support. I would also like to acknowledge our brokers Citigroup Global Markets Ltd ("Citi"), Canaccord Genuity Ltd ("Canaccord") alongside WH Ireland Ltd for their efforts in our successful fundraising for the Sonora Project and their unwavering effort throughout the period. Finally, I would like to thank all our shareholders for their support. I look forward to providing updates on our progress as we can commence construction works and move closer towards being a world class lithium producer in 2023.

Mark Hohnen, Chairman

5 March 2021

Operational Review

1.         Corporate review

Financial year 2020 has seen numerous developments on our path to fulfil the Company's strategic objectives. The Company's primary focus has been to complete the design and funding packages required to construct its Sonora Project.

Ganfeng initially invested in the Group in 2019 through its subscription for 29.99% share in Bacanora Lithium Plc and acquisition of a 22.5% stake in SLL, the operational holding company for the Sonora Project. In February 2021, Ganfeng completed its Option to increase its stake in SLL to 50%. Ganfeng purchased 73,955,680 new ordinary shares in SLL at 29.59p at a total value of £21.9 million. On completion a new JVA came into force, which replaces the original joint venture agreement entered into on 29 June 2019. Ganfeng now own 50% of the enlarged issued capital of SLL and will be responsible for funding its 50% pro rata share of the development cost of the Sonora Project. The funds received from the exercise of Ganfeng's Option will be applied towards the development of the Project. The board of SLL comprises two Bacanora appointed directors and two Ganfeng appointed directors, with the chairman being one of the Bacanora directors. Bacanora will remain as the operator of the Project, while Ganfeng will be responsible for leading certain EPC activities associated with the Project.

In order to fund Bacanora's share of the Project's capital expenditure, the Company completed a successful placing and retail offer in February 2021. The placing and retail offer raised gross proceeds of approximately US$65 million (£48.1 million) through the issue of a total of 106,995,885 new ordinary shares at a price of 45 pence per placing share. Furthermore, on 5 February 2021 Ganfeng approved a board resolution to exercise its pre-emptive right and to increase its shareholding in the Company. On completion, Ganfeng will subscribe for a total of 53,333,333 new ordinary shares at the placing price of 45 pence per share, representing gross proceeds of £24.0 million. Completion of this investment from Ganfeng is conditional upon obtaining certain approvals and consents from authorities in the People's Republic of China. On conclusion of their investment, the Company will have 384,144,901 shares in issue and Ganfeng will have an ownership level of 28.88%.

The Company has a US$150 million senior debt facility with RK which was entered into in July 2018. US$125 million of the debt facility remains undrawn. Given the passage of time from the initial agreement and the revised Project timeline, the Company and RK have signed a non-binding indicative term sheet to amend the existing facility to extend the maturity from 31 July 2024 to 31 July 2027 and extend the cash interest payment date commencing from 31 October 2020 to 31 October 2023. The completion of this extension and drawdown of the remaining tranches of the facility is conditional upon final Board approvals from both RK and the Company and entering into definitive legal agreements.

The combined total of the aforementioned fundraising proceeds, the undrawn RK facility, subject to agreeing the amendments described above, and cash on the Company's balance sheet, which stood at US$39.2 million on 31 December 2020, will meet the Company's share of the construction funding and projected working capital requirements of the Company to construct and commission the Project by H2 2023.

Group structure of operational entities at 31 December 2020

Bacanora Lithium Plc's ownership stake in SLL reduced from 77.5% to 50% on completion of the Ganfeng Option in February 2021.

On 29 October 2020, the Company completed the sale of Bacanora's 50% shareholding of DL to AIM-listed company, Erris, which has been renamed Zinnwald Lithium Plc. ZNWD was readmitted to AIM and the acquisition constituted a reverse takeover under AIM rules. Bacanora contributed its 50% investment in DL and €1.35 million cash. This cash was used to settle the commitment under the second supplemental joint venture agreement with SolarWorld AG and to pay for a portion of the transaction costs. Erris contributed its remaining cash and its Irish zinc and Swedish gold assets. In exchange, Bacanora received 90,619,170 shares in ZNWD and a net profit royalty. Following admission, ZNWD raised £3.75 million (before expenses) via a placing and now has 204,455,957 ordinary shares in issue. Bacanora therefore owns 44.3% of the enlarged ZNWD. The additional funds will accelerate the further development of the Zinnwald.

Whilst the COVID-19 crisis has challenged the normal running of the business, it has affirmed that the controls, procedures and systems in place in our operations were robust. Like all companies, Bacanora has had to adapt. The Company was able to continue its usual business processes, relatively unperturbed because of the use of technology to enable remote working in the UK and Mexico. The systems that had been put in place prior to COVID-19 were designed to allow remote working. The Company utilises a company-wide ERP system, cloud based shared drives as well as conferencing and co-working software for instance Zoom, PowWowNow and Microsoft Teams. Given the ongoing presence of the virus, certain staff continue to work from home.

Due to the unprecedented uncertainty in the midst of the COVID-19 crisis, the Board and Senior Executive Management agreed a 20% reduction in salary for the three month period from July 2020 to September 2020. Throughout the period, no corporate staff were furloughed.

a)   Operations review

In response to the COVID-19 crisis, the Mexican Ministry of Health declared a national health emergency and suspended all non-essential businesses in March 2020. Mining companies were obliged to halt all production and exploration activities and place their operations on care and maintenance. On 13 May 2020, the government of Mexico added mining to its list of essential businesses and announced plans for a gradual reopening of the country allowing mining companies to resume operations on 18 May 2020³. The government then had a broader relaxation of the lockdown rules from 1 June 2020 and started using a four tier traffic light monitoring system, which is updated twice-monthly. It is used to alert residents to the epidemiological risks and provide guidance on restrictions on certain activities. At the  turn of the year, the Sonora state was in orange status, but issued a "red alert,". This is a warning that a state's traffic light status could change to red if cases of COVID-19 continue to rise⁴. In the red tier, only businesses essential to economic activity are permitted to operate and people are only permitted to move outside their homes during the day. Mining has been deemed an essential industry, enabling miners to continue operations. Under orange status, companies which with non-essential activities may operate with 30% of their personnel and public spaces are permitted to re-open with reduced capacity⁵. Mexico has approved the AstraZeneca-Oxford, Pfizer-BioNtech, CanSino Sinovac and Sputnik V vaccines^6,7,8 and is on the road to vaccinating the population. During the period, the pilot plant has run on an "as needs" basis to supply engineering partners with samples around the mandatory shutdown period.

Like many companies in China, Ganfeng's operations, have been hampered by the outbreak of COVID-19. Precautions to limit the spread of the virus has led to travel restrictions, precautionary working from home and the extension of the 2020 Lunar New Year holiday break causing shutdowns at their facilities. In late April 2020, Ganfeng was able to reopen its factories and head office which has allowed the resumption of the technical work on the Sonora Project.

During the period, the Sonora Project was primarily focused on progressing the FEED work. Work to finalise the FEED is ongoing with experienced engineering groups. The plant is split into three sections. Engineering for the front-end ore concentrator and mechanical processing is led by GRES. GRES has completed its concentrator design work and will now integrate this into the overall project scope. The pyrometallurgical engineering, primarily for the kiln design, is being engineered by an international manufacturer of industrial kilns. The kiln optimisation, design and FEED engineering work is ongoing and will be completed in Q2, 2021. The hydrometallurgical plant, including the production of the final battery-grade lithium product, will be engineered by Ganfeng themselves due to their proven expertise in this field. On completion of the Ganfeng Option in February 2021, a new 50:50 JVA came into effect with Ganfeng. Consequently, Ganfeng are responsible for leading certain engineering and procurement activities for the lithium plant and will work jointly with GRES for the construction stage of the Project. Once Ganfeng completes their design work for the hydrometallurgical plant, GRES will develop an integrated "wrap" engineering package for the entire process plant. GRES has agreed to integrate a complete engineering, procurement, construction and/or management "EPC/M" solution for the plant to incorporate the process guarantees from the respective engineering firms for the pyrometallurgical and hydrometallurgical circuits.

A short list of LNG suppliers has been completed and supply sources, from Hermosillo or Agua Prieta, is now being evaluated with draft supply contracts being reviewed. Evaluation of co-gen power suppliers continued in 2020, with proposals from a shortlist of three providers currently under evaluation.

The Company made a second instalment payment of US$0.1 million in December 2020 for the Las Perdices plant site. This payment was in addition to US$0.2 million initial instalment made in July 2018 for the purchase of 1,173 Ha for the new plant site location. The second instalment enabled the beginning vegetation and topsoil removal. A remainder of US$0.3 million remains to be paid for the Las Perdices land for clearance of existing liens. Work to protect the flora at the plant site area has commenced, the Company is relocating the flora and is working to ensure that vegetation formerly located at the plant site is preserved.

Test well construction and pumping tests were completed in the period. This work enables the hydrological model to be validated for the selected site so that design of the permanent well can begin to supply process water for the site.

We continue to work with the community to develop an integrated sustainability programme, that will encompass the construction and operational phases of the Project. Unfortunately, COVID-19 continues to have an impact on the timing of community engagement. However, a framework for community engagement has been developed. In the process of developing the framework, education has been identified as a key enabler of employment for the community. Future community engagement activities will focus on education.

Lithium Market Update 2020

Despite the unprecedented global disruption precipitated by the COVID-19 pandemic, 2020 saw a revival in market sentiment for lithium. At the beginning of 2020, global consumption was expected to be 393,000 tonnes of LCE with production forecast to exceed 479,000 tonnes⁹. At the end of the year, estimates of consumption was only 305,000 tonnes of LCE and production was 431,000 tonnes for 2020 which represents 22% and 10% reduction in demand and production versus forecast respectively¹⁰. However, this level of consumption represented a 2.3% increase from 298,000 tonnes LCE in 2019, despite the COVID-19 related economic shock. Demand is expected to grow to 417,000 tonnes and 502,000 tonnes LCE in 2021 and 2022 respectively, with the production surplus shrinking significantly as volumes are expected to grow to 585,000 tonnes in 2022¹¹. Consequently, lithium stock turnover is forecast to reduce from 0.4 years to 0.3 years by 2022.

At the beginning of 2020, Fastmarkets reported 99.5% lithium carbonate battery-grade spot prices CIF China, Japan & Korea of US$8,000-9,500 per tonne¹². Across the year, prices weakened with comparative mid-point prices in December 2020 for lithium carbonate and lithium hydroxide at US$6,750 and US$9,000 per tonne respectively¹³. The reduction in lithium pricing was attributed to an oversupply of lithium products. This was compounded by dwindling lithium demand caused by rolling regional COVID-19 related lockdowns which restricted manufacturing output and reductions in consumer confidence, thereby dampening lithium demand. By November 2020, companies such as Orocobre reported a bottoming out of prices¹⁴ whilst in December 2020, 99.5% lithium carbonate China spot prices increase by 6.4%, month on month¹⁵.

Production has been constrained by production surpluses due to weak demand leading to low prices. Reductions in production have been predominately seen in the Australian spodumene mines. Prior to the COVID-19 crisis, oversupply was being addressed by reductions in production and expansion in the wider market. In January 2020, Galaxy Resources announced that in response to market conditions, it had reviewed operations at Mount Cattlin, resulting in a reduction in operations by circa 60%¹⁶. This continued from the trend in 2019, with a number of lithium companies either mothballing operations, reducing output, delaying construction of new capacity or filling for creditor protection^17,18,19,20. COVID-19 related disruption was relatively limited, the brine producers in Argentina had some interruptions to production in Q2 2020 as a result of government mandated COVID-19 related closures and short stoppage to respond to a COVID-19 outbreak for Orocobre's Olaroz²¹. COVID-19 had the biggest impact on active development or expansion stage of projects, due to logistical constraints imposed by the pandemic²². Ramping up these projects depends upon incentive pricing being available in market, however the latent capacity also constrains prices, whilst the market's supply and demand fundamentals are finely balanced in the short to medium term²³. The impact of COVID-19 on the consumer battery market was significant, however EV demand has increased significantly with sales of 3.24 million in 2020 which is a 43% increase year on year (2.26 million sold in 2019) despite an expected 14% drop in sales for the total automotive market²⁴. On 26 June 2020, Citi released an analyst research paper²⁵, which forecast ~19% five-year compound annual growth rate ("CAGR") to 2025 for lithium and a 25% forecast surge in 2021 as pent up demand rebounds. The paper forecasts that current levels of depressed lithium prices will prove unsustainable and expect prices will trend towards incentive pricing in order to encourage existing producers to ramp up their capacity and new players to enter the market. This will be required to avoid potential deficits and to meet expanding demand from the battery market, which will be driven by the rapidly expanding EV market. With high cost producers experiencing negative margins, Citi expect prices to move toward incentive pricing, with long-term prices estimated at US$9,000 per tonne and US$9,990 per tonne for battery-grade lithium carbonate and lithium hydroxide, respectively. In a research paper published by Wood Mackenzie, nearly 800,000 tonnes of additional LCE would need to come online in the next five years to meet the needs of the battery sector, based on its own Accelerated Energy Transition scenario, which sees global warming limited to 2.5 degrees Celsius²⁶. This would entail the electric vehicle market to require over 1,000,000 tonnes LCE in 2025. By 2025, demand is expected to outstrip supply by nearly 228,000 tonnes²⁷. At its battery day in September 2020, Tesla suggested that battery capacity could increase to 3 terawatt-hours by 2030, which is equivalent of 2.4-2.8 million tonnes of LCE per annum, which is four and half times the present global production capacity²⁸. Mining projects take years to design, build and commission, so investment in additional production capacity in the short to medium term will be key to avoiding major market deficits in the mid to late 2020s.

The election of the Mr. Biden to the US presidency and Democratic control over the House of Representatives and Senate has marked a significant shift in environmental policy in the world's largest economy. The far-reaching shifts in energy policy will have a knock on effect on the demand side fundamentals and therefore battery metal investments. Mr. Biden made significant manifesto promises to decarbonise America²⁹. Mr. Biden has re-joined the Paris Climate agreement and plans to spend up to US$2 trillion investment in clean energy over 4 years and ensure 100% clean energy by 2035. This is not entirely out of line with other estimates of the cost of decarbonizing the US power grid. Furthermore, specific plans for the automotive industry include support for car buyers to switch to EVs and a commitment to build 500,000 charging stations. 14.7 million new cars were sold in 2020 in the US, of which just 0.3 million plug-in hybrids and EVs were sold^30,31. The US electric vehicles market is expected to reach 6.9 million unit sales by 2025, which will be supported by expanded EV infrastructure³². Energy consultancy Wood Mackenzie says US$50 billion needs to be invested in lithium over the next 15 years to meet battery demand if the world is to meet the targets of the Paris climate accord³³.

Long-term price estimates of US$9,000 per tonne for battery-grade lithium carbonate from the middle of 2020³⁴ now seems conservative given the boost in demand these changes in policy will entail. In February 2021, Canaccord Genuity published research suggesting long-term prices could reach US$13,000 and US$15,000 per tonne for lithium carbonate and hydroxide respectively³⁵. This positive outlook has been mirrored by moves in the stock market, for instance, lithium miners and lithium and battery material ETFs saw large increases in value in Q4 2020, as an example Global X Lithium & Battery Tech ETF (LIT) increased 54.5% from US$40.05 on 30 the end of September 2020 to US$61.89 on 31 December 2020³⁶. Consequently, companies took advantage of the improved market sentiment by raising additional funds, for instance Galaxy Resources raised AU$161 million equity financing in November 2020 with proceeds to be applied to Sal de Vida stage 1 and James Bay³⁷. Between November 2020 and January 2021, Lithium Americas announced closing of US$100 million offering to fund working capital³⁸ and a further US$400 million offering to develop its Thaker Pass lithium project³⁹. Also, in January 2021, Neo Lithium Corp, raised C$30.1 million in a private deal placing to fund its 3Q lithium project in Argentina⁴⁰. In February 2021, Bacanora concluded a US$65 million equity raise and Ganfeng increased its stake in SLL from 22.5% to 50% for £21.9 million. Furthermore, subject to necessary approvals and consents from authorities in the People's Republic of China, Ganfeng plans to exercise pre-emptive right in the Company for £24.0 million, taking their holding to 28.88%.

As a result of the attractive long-term fundamentals of the lithium market and value opportunities in the market, new players are entering the lithium market via acquisition. For instance, in November 2020, Chile's state-owned Copper miner, Codelco, announced they had entered the lithium market and will go ahead with plans to explore for lithium at the Maricunga salt flat, the country's second largest in terms of reserves⁴¹. In December 2020, Australian diversified miner IGO Limited bought a 49% stake in Tianqi Lithium Energy Australia, equating to 24.99% in Greenbushes plus 49% in Tianqi's suspended Kwinana lithium processing plant, for US$1.4 billion, which enabled Tianqi to reduce debt accumulated during the acquisition of SQM⁴².

Governments around the world are continuing to respond to the climate crisis and the economic fall-out from the COVID-19 crisis by increasing or extending incentives for EVs as part of eco-friendly stimulus packages. Italy has made additional funds available for its EV purchase incentives in 2021 and 2022, as well as a €1,500 (US$1,690) car scrappage scheme. In France, the government announced enhanced EV subsidies and scrappage schemes where buyers could be eligible to receive €12,000 (US$13,150) towards an EV⁴³. In Germany, the government announced subsidies for EVs until the end of 2025 and a longer term benefit abolition of vehicle tax for purely electric cars until the end of 2030⁴⁴. In November 2020, the UK government announced its green agenda which includes a ban on new cars and vans powered wholly by petrol and diesel from 2030 and to produce enough offshore wind to power every home in the UK, quadrupling how much it produces to 40 gigawatts by 2030⁴⁵. In the UK, there are already a raft of incentives for EVs, including a maximum grant of £3,500 and £8,000 for cars and vans respectively, £500 for home charging point installation, no vehicle excise duty, and company car drivers choosing a pure electric vehicle will pay no benefit-in-kind tax in 2020/21. As part of the COVID-19 recovery plan, the UK government announced measures to support the battery market for the UK's first gigafactories, research and development and EV infrastructure⁴⁶. EV battery firm Britishvolt and the Welsh government confirmed plans to open the UK's first gigafactory in 2023⁴⁷. The Chinese government also extended its subsidies for EVs until 2022, which were originally planned to end in 2020, although the government announced subsidies will be reduced by 20% in 2021⁴⁸.

In the US, oil and gas producers will no longer enjoy the subsidies worth an estimated US$20 billion annually, that were available under the previous administration⁴⁹. This will make carbon intensive energy more expensive, changing the relative economic cost of EV transportation and renewable power versus their fossil fuel powered alternatives. Grid parity will have been reached when the cost of renewable electricity generation becomes equal to or less than the cost of electricity generated using fossil fuels. At this point widespread development of renewables becomes economically beneficial without subsidies or governmental support which will be the catalyst for faster adoption of renewables and storage for the grid. Full grid parity involves more than just a bare comparison of final electricity prices produced by renewables projects because of the intermittent nature of this energy type and the grid issues that come with the peaks and troughs of supply. Full grid parity occurs when the cost of renewables is less expensive than fossil fuel derived energy, after including the cost of power infrastructure or when the combination of renewable plus-storage reaches grid parity⁵⁰. In countries like the US, which lack an integrated national transmission grid, batteries will be called on to smooth local and regional imbalances between power supply and demand. Evidence of this process materialised in August 2020, when LS Power's 250MW/250MWh Gateway Energy Storage project in San Diego County, California, dethroned the Hornsdale Power Reserve in Australia as the world's largest battery. Even larger storage projects are in the pipeline, with Vistra Energy replacing a natural gas power plant with a 6,000MWh battery project in California, Neoen has filed plans to build the Goyder South project, a hybrid wind and solar power plant in South Australia with a 1,800MWh battery⁵¹, and a development on the west coast of Saudi Arabia, which spans, will be powered solely by wind and solar energy with a battery storage facility with a 1,000MWh capacity⁵².

Currently, Europe has 15 large-scale battery cell factories under construction, including Northvolt's plants in Sweden and Germany, CATL's German facility, and SK Innovations second plant in Hungary. By 2025 planned European facilities will produce enough cells to be self-sufficient for the European automotive industry and power at least 6 million electric vehicles⁵³. In the US, Tesla secured its own lithium mining rights in Nevada and have signed an off-take agreement with Piedmont Lithium for spodumene concentrate from North Carolina in order to secure local lithium supplies⁵⁴. Furthermore, Tesla plans to manufacture its own "tabless" (Tesla is removing the tab that connects the cell to the item it is powering) batteries in-house, which will further strengthen the company's supply chain as well as the vehicles' range and power⁵⁵. This push for localisation provides an opportunity for Sonora Project and ZNWD to supply the key element, lithium, to their respective geographic markets.

For the lithium market to expand at 18%+ CAGR to 2030⁵⁶, barriers for mass-market uptake of EV's must be overcome. Presently, these are range anxiety (range, recharging speed, charging infrastructure) and cost (cost to buy, battery life, running costs, residual value). 2020 has seen a host of significant announcements on technological advancements for lithium batteries that ameliorate these issues. Current lithium-ion batteries utilise an anode (the negative electrode) made of graphite often with some silicon added, a cathode (the positive electrode) and a liquid electrolyte to pass lithium ions between the electrodes. The cathode plays an important role in determining the characteristics of the battery as the battery's capacity and voltage are determined by the cathode material. The potential difference is usually small for the anode, but the potential difference is relatively high for the cathode. Therefore, the cathode plays a significant role in the voltage of the battery. The greater amount of lithium, the bigger the capacity; and the bigger potential difference between cathode and anode, and therefore the higher the voltage⁵⁷. In existing commercial batteries, cathodes are frequently made from lithium cobalt oxide, lithium manganese oxide, lithium iron phosphate ("LFP"), as well as lithium nickel manganese cobalt oxide ("NMC") or lithium nickel cobalt aluminium oxide⁵⁸. Developments in the use of cathodes affect the type of lithium raw material used in its production and therefore the market dynamics of that material. LFP and NMC batteries often use lithium carbonate for their production, whilst high purity, nickel-based lithium batteries tend to use lithium hydroxide⁵⁹.

NMC cathodes are widely used in automotive industry for EV batteries. There are, however, significant draw backs in using cobalt, it is very scarce leading to high cost, with the primary source being the Democratic Republic of Congo with related uncertainty inherent in its supply chain and questionable mining practices. Cobalt is also very dense. At their "Battery day" Tesla have announced that they plan to use cobalt-free cathodes and use nickel-rich cathodes instead. It is expected to lower Tesla's cost per kilowatt hour. Tesla "tabless" cells, which Tesla is calling the 4680 cells referring to the size of the cells, will make its batteries six times more powerful and increase range by 16 percent. In all, Tesla plans to reduce the cost of its battery cells and packs, in order to build a US$25,000 electric car, servicing the mass market. This shift away to high purity, nickel batteries may favour lithium hydroxide producers in future.

Conventional lithium battery life is limited by the growth of dendrites, which form from the chemical deposition of lithium on the anode. Dendrites reduce battery capacity over many charge cycles. Failure of the battery occurs when dendrites grow large enough to reach the cathode; this causes shorting in the battery and potentially a fire⁶⁰. The potential for conventional Li-ion batteries to overheat, means that they require costly and weighty thermal control systems. Significant investments are being made into solid-state batteries as they have benefits including higher energy densities, faster charging rates and a higher degree of safety compared to conventional lithium-ion batteries because solid electrolytes control dendrite formation in lithium batteries. Solid-state lithium batteries utilise a lithium metal anode instead of graphite and replace liquid electrolyte in favour of a solid one. BloombergNEF expect that solid-state battery cells could be manufactured at 40% of the cost of current lithium-ion batteries⁶¹. Research into commercialisation of solid-state batteries continues apace with many well-backed companies vying for supremacy. Companies such as Ionic Materials are backed by Nissan, Mitsubishi and Renault, Sion Power are backed by BASF, and Solid Power have backing from Samsung, Ford, BMW and Hyundai⁶². QuantumScape is developing solid-state batteries and is backed by US$300 million worth of investment from Volkswagen and Bill Gates' Breakthrough Energy Ventures⁶³.

Samsung's Advanced Institute of Technology ("SAIT") has revealed a new solid-state battery, with more than treble the energy density of similarly sized batteries (Samsung 900Wh/L vs Tesla lithium-ion 272Wh/L) meaning a +1,000km range would be within grasp. Furthermore, Samsung says that they can be recharged more than 1,000 times (about a million kilometres of total range)⁶⁴. There is fierce competition to produce commercially available power packs, although there are difficulties in identifying where all market players are in their development of solid-state batteries and assessing the veracity of competing claims. Solid Power announced that its solid-state cells can be manufactured at commercial scale using industry standard lithium-ion roll-to-roll production equipment. Its cells are currently under performance validation by its automotive partners and expect to begin the formal automotive qualification process with even larger capacity solid-state battery cells in early 2022⁶⁵. Car manufacturers like Toyota expect to manage mass production of solid-state batteries from the middle of the decade and Volkswagen do not expect to have solid-state batteries ready for car use until at least 2025⁶⁶. In the medium term at least, conventional Li-ion batteries will dominate the market. Battery packs with a cost of US$100/kWh has been described as the price to enable EVs to reach a price parity with internal combustion vehicles without subsidies⁶⁷. According to a survey of nearly 150 buyers and sellers by BloombergNEF, the average price per kilowatt-hour for a lithium-ion battery pack, has fallen to US$137 in 2020, down 13% from US$157 in 2019⁶⁸ BloombergNEF analysts said they expect battery makers to hit US$101/kWh in 2023. For the first time, the survey found some prices reported for e-bus batteries in China selling at US$100/kWh. CATL says it is ready to produce a conventional Li-Ion battery that can power an electric vehicle for more than 1.24 million miles, over a period of 16 years⁶⁹ marking a major increase over current offerings; Tesla are currently offering warranties of up to 8 years or 0.15 million miles, whichever comes first⁷⁰. According to the Chairman of CATL the battery would cost about 10% more than current EV batteries. The cost of CATL's cobalt-free LFP battery packs has fallen below US$80/kWh, with the cost of the battery cells dropping below US$60/kWh and CATL's low cobalt NMC battery packs are close to US$100/kWh⁷¹. With the recovery of the precious elements in the batteries from recycling and potentially "second life" usage of batteries in grid/home storage, it is not difficult to see that tipping point for cost is very close to being realised. Given the far lower maintenance costs and energy costs for EVs, combined with similar price points means lower cost of ownership than vehicles with internal combustion engines, which will surely prove a watershed for runaway adoption. In the longer term, LCE consumption is forecast to reach 1,000,000 tonnes by between 2025 and 2027^72,73, based on growing uptake of EV's and grid storage for renewable energy. The supply overhang will narrow as demand grows rapidly, rebalancing of the supply and demand fundamentals by 2024 based on research by Citi⁷⁴. Lithium resources are widely available; however, the process of extraction is key to exploiting an economic resource. With Sonora's estimated cost of production of around US$4,000 per tonne, the Sonora Project sits in the lower quartile of lithium production costs, giving it a significant competitive advantage when compared to the higher cost producers such as the existing spodumene production in Australia. Whilst there is a degree of uncertainty in the nascent lithium market, Bacanora is well placed to weather the near-term oversupply related price fluctuations and COVID-19 given favourable production costs and the high-quality nature of our product.

Financial Review

The Group made a total comprehensive loss of US$15.6 million for the year ended 31 December 2020, which includes a US$4.1 million loss on discontinued assets. Excluding this the Group made an underlying comprehensive loss from continuing operations of US$11.5 million compared with the loss of US$4.9 million for the six month period ended 31 December 2019.

On 29 October 2020, the Group completed the sale of its 50% shareholding in DL to AIM-listed Erris Resources Plc. Bacanora contributed the 50% investment in DL and €1.35 million cash. The cash was used to settle the commitment under the second supplemental joint venture agreement with SolarWorld AG and to pay for transaction costs. Erris contributed its remaining cash and its Irish zinc and Swedish gold assets. In exchange, Bacanora received 90,619,170 shares (44.3%) in the enlarged Erris and a 2% net profit royalty. Erris was subsequently renamed as Zinnwald Lithium Plc. As a result of the transaction, the loss on discontinued operations includes the Group's 50% share of DL's US$0.2 million loss during the ten month investment period, which was US$0.1 million and an impairment charge of US$4.0 million on the derecognition of the investment in DL.

The sale of the investment will allow ZNWD to drive the project forward with the JV partner, SolarWorld AG. The new structure will enable ZNWD to raise the funding required to develop the project. Following the completion of the sale, the Group has no further commitments relating to SolarWorld AG, DL or ZNWD. The opening fair value of the Company's 44.3% was US$7.7 million using the ZNWD's traded price. During the two months to 31 December 2020, the Group's share of ZNWD's loss was US$0.1 million.

During the year ended 31 December 2020, the Group incurred US$4.4 million general and administrative costs (six month period ended 31 December 2019: US$2.8 million) and share-based payment expense of US$0.6 million (six month period ended 31 December 2019: US$0.3 million). The operating loss was US$5.3 million for the year, this represents a reduction on a pro-rata basis (six months to December 2019 US$ 3.2 million). Savings were made due to reduced corporate and operational activities compared to the prior period as well as careful cost management on legal and professional fees, travel and office expenses. The Board and Senior Executive Management also took temporary pay cuts during the period in response to the COVID-19 crisis.

The Group incurred finance costs of US$6.8 million in relation to the Company's debt financing for the year ended 31 December 2020 (six month period ended 31 December 2019: US$2.4 million), of which U$0.7 million was interest paid in cash. The finance cost increased during the year due to an adjustment to the amortised cost of borrowings following a change in estimated timing of contractual cash flows. The finance cost during the year included a loss on revaluation of financial warrants of US$1.0 million. Finance income totalled US$0.4 million during the year being interest income on cash reserves. For the six month period ended 31 December 2019, total finance income was US$0.9 million, which included interest income of US$0.2 million and a gain on revaluation of financial warrants of US$0.7 million.

The net assets of the Group decreased to US$49.9 million at 31 December 2020 from US$65.0 million at 31 December 2019, due primarily to the US$4.1 million loss on discontinued operations and underlying comprehensive loss from continuing operations for the twelve month period of US$11.5 million.

The Group had a cash balance of US$39.2 million at 31 December 2020, which decreased by US$9.7 million from US$48.9 million at 31 December 2019. The reduction in cash was a result of cash expenditure on operations of US$4.8 million, US$2.0 million on property, plant and equipment and exploration and evaluation assets and US$0.7 million on funding of DL and US$1.6 million on the sale of DL to ZNWD. The Group paid US$0.7 million interest on the RK debt finance and US$0.1 million for the cost of issuance of shares, but this is offset by interest income of US$0.4 million on cash reserves.

Given the unprecedented COVID-19 health and ensuing economic crises, many companies have seen their balance sheets come under duress since the turn of the year. Being at a preconstruction phase of operations, Bacanora has not entered into commitments to develop the Sonora Project and retains a significant cash balance. Consequently, the Directors have, at the time of approving the Financial Statements, a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future.

Financing update:

Despite the impact of the ongoing COVID-19 pandemic on Project financing, the Company has made significant strides in order to secure the funding required to develop the Sonora Project. Bacanora's cornerstone investor and offtake partner, Ganfeng, completed its Option to increase its stake in SLL from 22.5% to 50% on 26 February 2021. Ganfeng subscribed for 73,955,680 new ordinary shares in SLL at 29.59 pence at a total value of £21.9 million. The strategic investment from Ganfeng forms a major part of the finance package for the construction of an initial 17,500 tonnes per annum lithium operation for the  Sonora Project. As part of the revised JV agreement, Ganfeng and Bacanora will contribute proportionally to the construction funding for the Sonora Project in SLL.

In order to complete Bacanora's 50% share of the Sonora Project construction funding requirement, Bacanora embarked on an ambitious fundraising process. On 8 February 2021, Bacanora completed a successful placing and retail offer which raised gross proceeds of approximately US$65 million through the issue of a total of 106,995,885 new ordinary shares at a price of 45 pence per placing share. Furthermore, on 5 February 2020 Ganfeng approved a board resolution to exercise its pre-emptive right and to increase its shareholding in the Company to 28.88%. Ganfeng will subscribe for a total of 53,333,333 new ordinary shares at the placing price of 45 pence per share, representing gross proceeds of £24.0 million. Completion of this investment from Ganfeng is conditional upon obtaining certain approvals and consents from authorities in the People's Republic of China.

Bacanora continues to have a conditional US$150 million debt facility with RK Mine Finance, of which US$125 million remains undrawn. Given the passage of time from the initial agreement and the revised Project timeline, the Company and RK have signed a non-binding indicative term sheet to amend the existing facility to extend the maturity from 31 July 2024 to 31 July 2027 and extend the cash interest payment date commencing from 31 October 2020 to 31 October 2023. The completion of this extension and drawdown of the remaining tranches of the facility is conditional upon final board approvals from both RK and the Company and entering into definitive legal agreements.

Careful stewardship of the Company's capital resources have meant that the Company enjoyed a strong cash position of US$39.2 million at the year end. This contributes to the Company having the necessary financial package, together with the proceeds from the placing and retail offer and undrawn RK facility, to cover its 50% share of the capital costs required for Sonora and will enable the Company to commence construction of the Project in 2021.

I look forward to updating the market with further announcements on the financial performance of the Company in future.

On behalf of the Board of Directors,

Janet Blas

Chief Financial Officer

5 March 2021

Consolidated Statement of Financial Position

As at 31 December 2020

Consolidated Statement of Comprehensive Income

For the twelve month period ended 31 December 2020