First Cobalt to acquire US Cobalt and its Iron Creek project in Idaho

The proposed acquisition of a junior explorer with a cobalt project in Idaho will give Canada-focused First Cobalt (TSXV: FCC; US-OTC: FTSSF) a footprint in the U.S. and burnish its reputation as a pure-play cobalt company, with assets outside the Democratic Republic of the Congo.

First Cobalt will acquire US Cobalt (TSXV: USCO; US-OTC: USCFF) in a friendly all-share deal worth $149.9 million. Once the transaction closes, First Cobalt and US Cobalt shareholders will own 62.5% and 37.5% of the combined company on a fully diluted, in-the-money basis.

“We know most of the world’s cobalt is mined in the DRC and refined in China, but we want to find it and refine it in North America and sell it to North Americans,” Trent Mell, First Cobalt’s president and CEO, says in an interview. “Our vision is North American cobalt from end to end.”

If shareholders approve the transaction, it will be First Cobalt’s third big acquisition since late last year, when it acquired Cobalt One and CobalTech. Now the company controls over 100 sq. km of prospective land and 50 historic mining operations in the Cobalt area of Ontario.

It also owns a mill and cobalt refinery 25 km from its Keeley-Frontier project. The Yukon refinery is one of only four facilities in Canada that is environmentally permitted to treat and process ore containing arsenic, and the only one in North America with no limits on processing or storing arsenic from feeds.

An aerial view of First Cobalt’s Keeley cobalt property in northern Ontario. Credit: First Cobalt.

Drill core from US Cobalt’s Iron Creek project in Idaho. Credit: US Cobalt.

First Cobalt has had its sights on US Cobalt’s Iron Creek cobalt property in central Idaho since October 2017 for three reasons: it’s in North America; its geology is favourable and easily understood; and it can be fast-tracked into production and provide feed for its refinery in Ontario.

Iron Creek has a historic resource of 1.3 million tons (1.2 million tonnes) grading 0.59% cobalt, and Mell expects a National Instrument 43-101 compliant resource estimate to be calculated by year-end.

Mell notes that while First Cobalt’s assets include almost half of the historic mining properties in the Cobalt camp of Ontario, where its exploration team has confirmed 15 targets already, it’s at an earlier stage and the company still has a lot more work ahead to understand the geology and structural controls of a camp that mined high-grade silver underground. The Ontario properties also contain five elements — silver, cobalt, nickel, bismuth and arsenic — which makes it more complex, Mell says, adding that the company probably won’t have its first resource estimate out until 2019.

By contrast, US Cobalt’s Iron Creek project is in a well understood geological setting and already has a historic resource estimate.

“In Idaho, you have these specific lenses, and once you’re in them, it’s pretty straightforward to drill them out,” the mining executive says. “We have a massive land position in Ontario and the potential there is really good, but over the shorter term, US Cobalt is a smaller footprint with real resource potential, and it could go out well beyond the historical estimate.”

Iron Creek — 42 km from the town of Salmon and 29 km southeast of eCobalt Solutions’ (TSX: ECS; US-OTC: ECSIF) feasibility stage Idaho cobalt project — initially drew interest in 1946 as an iron prospect.

Hana Mining explored for copper at Iron Creek in the 1970s, while Inspiration Mines, Cominco and Noranda Exploration all finished work programs there in the 1980s and 1990s. It was Noranda that put together the historic resource estimate.

A driller on a rig at First Cobalt’s project near Cobalt, Ontario. Credit: First Cobalt.

Since US Cobalt took over, the company has drilled 10,600 metres from surface, rehabilitated two of its three adits and started drilling underground.

Underground workings in the three adits total 450 metres. The first adit cuts the eastern part of the mineralized zone, and the second adit is cut along strike of the mineralized zone in the west.

Highlights from US Cobalt’s drill program include hole 17-19, which was drilled between the first and second adit on the western part of the mineralized zone where the historic resource was calculated, and 15 metres below the level of the second adit. The hole returned 16.5 metres starting from 36.9 metres downhole averaging 0.34% cobalt and 0.54% copper, including 6.1 metres of 0.43% cobalt and 0.30% copper.

Hole 17-29, which was drilled below the first adit, returned 30.5 metres from 113.1 metres downhole, averaging 0.35% cobalt and 0.53% copper, including 6.1 metres of 0.52% cobalt and 0.94% copper.

“The two adits are some distance apart and they’re successfully drilling in the gap between adit one and adit two, and they’ve also tested the western extent of known mineralization and had some great hits,” Mell says.

If Iron Creek becomes a mine, it could cost US$125 per tonne to ship concentrate by rail from Idaho to its refinery in Ontario, Mell estimates. “The freight cost on a tonne of copper-cobalt concentrate is quite manageable,” he says.

First Cobalt president and CEO Trent Mell scouting properties in the Democratic Republic of the Congo. Credit: First Cobalt.

In the meantime, First Cobalt is evaluating what it would cost to recommission its refinery and expects to have the results of some of its early engineering studies in the next few months.

Under the transaction announced on March 14, all of the issued and outstanding shares of US Cobalt would be exchanged on the basis of 1.5 of a First Cobalt share for each US Cobalt common share, representing a 61.8% premium to US Cobalt’s closing share price as of March 13, and a 58.5% premium based on the five-day, volume-weighted average trading prices of both companies.

Mell says the management teams of both companies recognized the deal’s strategic nature and its upside.

“We know their management team. We’ve all been in the industry for a bunch of years, and like the three-way merger last year, it’s refreshing to do a transaction with a management team that is not entrenched, which can kill good business ideas,” he says. “It was about, ‘this makes sense,’ and once again we could pull it off because we had an enlightened group of executives who didn’t mind walking away.”

Mell says there are 100 juniors with an interest in cobalt that have popped up over the last year to ride the wave of electric-vehicle batteries and smartphones, but says many will have a hard time succeeding.

“A lot of them are floundering — there are just too many of them,” he says. “Our vision has always been to become a meaningful player and we’re acquiring what will be our third company. We have no issue with capital and we’re serious about our objectives. People are now coming to us with their best ideas, and it’s working out very nicely.”

First Cobalt has $29 million in its treasury and a 2018 budget of $10 million. The company is debt-free.

Mell forecasts a shortage of cobalt over the next five years.

The cobalt price jumped 109% last year, making the metal “the star performer among its peers,” Wood Mackenzie said in a recent research note.

“Cobalt prices have surged higher in the early part of 2018,” the consulting firm noted, “with the LME cash price averaging US$80,875 per tonne over February — up 4.4% from January levels and 133% year-on-year.”

First Cobalt’s permitted cobalt refinery in northern Ontario, where the company envisions processing ore from the Iron Creek project in Idaho. Credit: First Cobalt.

Wood Mackenzie noted that the DRC accounted for 64% of 117,000 tonnes of global cobalt production in 2017, and that a revised mining code in the African nation “has the potential to seriously affect mining projects under way in the country, which is so crucial to the cobalt story.”

“Cobalt demand totalled 104,000 tonnes last year — 49% of which was from the battery sector — and will grow by an additional 9% this year to reach 113,000 tonnes,” Wood Mackenzie said. “By 2022, we forecast cobalt demand from batteries alone to reach 98,000 tonnes — or 61% of the cobalt market.”

But the consulting firm also expects that incremental supply from Glencore, ERG and others will create “significant surpluses in the years 2019 to 2022,” which “will likely keep a cap on price levels.”

“Following an average of US$70,548 per tonne this year, we expect prices to ease back to US$55,116 per tonne in 2019, before falling further to a low of US$33,069 per tonne in 2020 and 2021.”