'The future is nickel': Cobalt 27 sells off its namesake metal after tough year
Biggest shareholder to buy cobalt assets, new company spun off for nickel
A core sample containing nickel.Steve Karnowski/AP Photo files
June 18, 2019
4:17 PM EDT
Toronto-based Cobalt 27 Capital Corp. is selling out at a low point for its namesake metal, a crucial component in the lithium-ion batteries used in electric vehicles and other devices.
The company, which stockpiles and streams cobalt, on Tuesday announced a $510-million deal that splits the company along cobalt and nickel asset lines.
Its largest shareholder, Swiss private-equity firm Pala Investment Ltd., which owns more than 19 per cent, will pay $3.57 cash per share for the company’s cobalt assets. The rest of the shareholders will also receive equity in a new company that retains the company’s nickel assets plus $5 million in cash.
The announcement comes after Cobalt 27’s stock has declined 64 per cent in the past year to $3.47, in concert with falling cobalt prices, which remain volatile as the market struggles to forecast the supply-and-demand picture amid soaring excitement about the potential growth of the electric-vehicle market.
“It’s not an egregiously unfair deal based on the spot price of the metals,” said Jonathan Guy, an analyst at Numis Securities Ltd. “Many people may say that Pala is buying it out at a low in the cobalt price, but that’s why they’re doing it. They don’t think market is pricing it fairly.”
Cobalt prices last summer exceeded US$40 per pound, but have since declined to US$12.70, according to Infomine.
That drop sent ripples through Cobalt 27, which almost a year ago paid $300 million in cash for a 32.6-per-cent stream on the cobalt from Vale SA’s proposed Voisey Bay Mine expansion. This March, it recorded a $68.8-million impairment related to that deal.
Anthony Milewski, Cobalt 27’s chief executive and chairman, and others have attributed cobalt’s price decline to unexpected production from “artisanal” miners in the Democratic Republic of Congo — meaning individuals who are not formally associated with any mine — and also a de-stockpiling of cobalt in China.
Some analysts say the pace of the decline has been falling in recent months, but many believe any recovery will take awhile.
“Our view calls for an increase in cobalt over the next three to four years,” said Colin Healey, an analyst at Haywood Securities Inc. “But an immediate cobalt bounce doesn’t seem likely.”
Milewski used to work at Pala, which was one of Cobalt 27’s initial investors, and the deal includes a termination fee to Pala of between $15.5 million and $17 million.
He said the deal provides Cobalt 27 shareholders with an exit point.
The deal pegs the shares in the spinout company — to be called Nickel 28 (nickel is No. 28 on the periodic table) — at $2.18, which when combined with $3.57 in cash theoretically offers shareholders $5.75 per share.
“It’s a 60-per-cent premium,” Milewski said. “That’s a massive premium … in a declining cobalt market — that’s pretty crazy.”
Cobalt 27’s share price jumped 20.7 per cent to $4.19 as of Tuesday afternoon.
“Cash is cash,” said Colin Healey, an analyst at Haywood Securities Inc. “Clearly, the market isn’t giving (Nickel 28) full credit for $2.18.”
Several analysts said they were still trying to determine how the value of the deal was estimated and what exactly Nickel 28’s strategy would be.
Milewski said the new company’s main asset is an 8.56-per-cent joint-venture interest in Ramu, a nickel mine in Papua New Guinea. It also has royalty streams on potential nickel mines, including Royal Nickel Corp.’s Dumont mine in Quebec, and stakes in nickel companies.
The Ramu mine provides about $25 million in annual cash flow, said Justin Cochrane, Cobalt 27’s chief financial officer. But he said the joint venture needs to pay off about $110 million in debt.
Under the proposed deal, Milewski and his management team retain their positions at Nickel 28.
Like cobalt, nickel is a crucial component in lithium-ion batteries and may become more so as technology evolves.
“Look, I think the future is nickel,” Milewski said, adding price pressure will increase.