Proposed Pala deal undervalues Cobalt 27: Anson Funds

In June, Cobalt 27 Capital’s (TSXV: KBLT) board agreed to a $501-million takeover offer from Pala Investments, which already owns 19% of the company.

Cobalt 27 has a cobalt stream on Vale’s (NYSE: VALE) world-class Voisey’s Bay nickel-copper-cobalt mine in Labrador beginning in 2021; holds an 8.5% joint-venture interest in the producing Ramu nickel-cobalt mine in Papua New Guinea; owns one of the world’s largest stockpiles of physical cobalt; and manages a portfolio of 11 royalties on mineral properties containing battery metals.

Under the proposed deal, Cobalt 27 shareholders would receive $5.75 per common share, consisting of $3.57 in cash, plus one share of a newly listed company, Nickel 28 Capital Corp., valued at $2.18 per share.

The new entity would be funded with US$5 million in cash and hold Cobalt 27’s interest in the Ramu mine, its royalty portfolio on future projects, and its equity position in Giga Metals (TSXV: GIGA; US-OTC: HNCKF).

What won’t be transferred to Nickel 28 are two of Cobalt 27’s most valuable assets — its physical inventory of cobalt and its stream on Voisey’s Bay, both of which Pala will keep.

Anson Funds, a long-standing shareholder in Cobalt 27, warns that the deal undervalues the company.

The privately held asset manager argues the transaction “effectively results in the sale of the company’s crown jewel asset — the Voisey’s Bay cobalt stream, to a related party at fire-sale prices, and without paying a control premium.”

Anson calculates that the sale price of the Voisey’s Bay stream is US$180 million, “which represents a 40% discount to the price that the company’s board of directors and management paid for the stream one year ago.

“In addition, the transaction effectively crystallizes losses in excess of US$225 million on the sale of physical cobalt and the Voisey’s Bay stream, representing a loss of almost 50% of cost,” Anson said in a press release.

“Anson is perplexed as to why the company has entered into an agreement with a related party to liquidate both its physical inventory and its crown jewel royalty stream, at a time when cobalt prices are near five-year lows,” the fund noted. “Despite management’s poor track record of capital allocation and the current cyclical low in cobalt prices, Cobalt 27 is in sound financial condition, with positive working capital in excess of US$50 million — inclusive of the value of their physical cobalt inventory.”

Cobalt 27 Capital chairman and CEO Anthony Milewski holds cobalt briquettes at a Rotterdam warehouse in 2018. Credit: Cobalt 27 Capital.

Anthony Milewski, Cobalt 27’s chairman and CEO, declined to comment on Anson’s claims.

He also declined to comment on entitlements and benefits to certain employees and consultants of the company that will be triggered under a change of control provision. If the transaction is approved, Milewski will receive US$7.7 million, while Justin Cochrane, the company’s president and chief operating officer, will be entitled to US$5.3 million.

Cobalt 27 filed its management circular seeking approval for the acquisition on Aug. 14. In a press release, the company stated that the deal represents a 66% premium to the company’s closing share price on June 17, and a 46% premium to its 20-day, volume-weighted average trading price.

Management noted that the cash component of the deal was “significant,” and “delivers immediate liquidity and value certainty” to its shareholders “at a time of significant market volatility and amidst an uncertain outlook for cobalt prices and the global economy, and at an implied cobalt price well in excess of the spot average price of US$12.53 per lb., as of July 31, 2019.

“In the latter half of 2018, cobalt prices began to decline significantly, and by June 2019, prices had fallen 66% from their April 2018 peak of US$44.10 per lb. to US$15.12 per lb.,” the press release read. “The board and special committee’s knowledge of cobalt supply-demand dynamics informed their view that a sustained rebound in cobalt prices in the short- to medium-term is unlikely.”

Cobalt 27 also pointed out that the company’s shareholders, through their ownership of shares in Nickel 28, “will continue to be exposed to the electric vehicle revolution,” and pointed out that since the arrangement was announced, and as of Aug. 8, “nickel prices have increased by approximately 33%, while cobalt prices have decreased by approximately 13%.

Bulk-sampling activity at RNC Minerals’ Dumont nickel-cobalt property in Quebec. Cobalt 27 Capital has a 1.75% net smelter return royalty on the asset. Credit: RNC Minerals.

“Nickel 28 is valued at $2.18 per share, which is comprised of the purchase price that Cobalt 27 paid for each of the assets being transferred to Nickel 28, plus an enhanced value for the Dumont royalty, which recently released an updated feasibility study,” Cobalt 27’s press release stated. “These assets are primarily leveraged to the price of nickel, and all of these assets were purchased in a substantially lower nickel price environment.”

Management also said that if the deal is approved, Pala will repay, at closing, up to US$48.5 million of net corporate debt, and, “absent the transaction, Cobalt 27 would need to service and repay the majority” of the debt “using its own resources.”

Apart from Pala’s offer, Cobalt 27 received three non-binding proposals for alternative transactions, the company added, “however, none of the proposals were for an acquisition of Cobalt 27 as a whole, and each proposal was for total cash consideration less than the cash component per share of Pala’s offer.”

The annual general and special meeting of shareholders is scheduled for Sept. 12.

At press time, Cobalt 27 traded at $3.85 per share in a 52-week range of $3.27 to $7.02. The company has 85.5 million common shares outstanding for a $329-million market capitalization.