Cobalt 27 Capital Corp. (KBLT:TSX.V; CBLLF:OTC; 27O:FSE) entered into a definitive agreement to acquire Highlands Pacific Ltd., which owns an 8.56% interest in the operating Ramu nickel-cobalt mine in Papua New Guinea, Canaccord Genuity analyst Eric Zaunscherb reported in a Jan. 2 research note.
Zaunscherb noted that while the transaction means Cobalt 27 will have its "thirst slaked" for growth in battery materials exposure via a stream on Highlands' copper and nickel from Ramu, it will result in "waters muddied."
Specifically, by buying Highlands outright versus acquiring streams on its nickel (Ni) and copper (Co) production, Cobalt 27 will now have greater exposure to the two metals at 62% of the cost—600,000 pounds of Co and 6.4 million pounds of Ni as opposed to 45,000 pounds of Co and 2.25 million pounds of Ni. However, the company will gain added operational and capital risk to its asset portfolio.
The analyst presented several key points about the proposed Cobalt 27-Highlands transaction. One is that Ramu seems to have reached steady production, now at 3,300 tons of copper and 34,000 tons of nickel per year, and that a US$1.5 billion expansion in one to two years is under consideration.
Another salient point is that Highlands currently indirectly owns 8.56% of Ramu, and local stakeholders own 6.44%. "Both may increase their ownership of Ramu to 11.3% and 8.7%, respectively, by repaying construction and development loans," Zaunscherb stated. The remaining 85% of Ramu is owned by MCC, a Chinese mining group majority owned by the US$9 billion China Metallurgical Group Corp.
Third, Cobalt 27 agreed to acquire all issued ordinary shares of Highlands that it or PanAust, a subsidiary of a Chinese state-owned operation, does not already own. "Base consideration is AU$0.105 per share in cash, which represents a 30% premium to Highlands' 20-day volume-weighted average price," the analyst noted.
Fourth, Highlands will try to buy back 128 million of its shares owned by PanAust. In exchange, PanAust will be given ownership of Highlands' interest in a different project along with US$0.3 million in cash.
Finally, the Cobalt 27-Highlands deal is expected to close in Q2/19.
Canaccord Genuity maintains its Speculative Buy rating and CA$15.50 per share target price on Cobalt 27, whose stock is currently trading at around CA$3.80 per share. "We continue to view the company as the premier investment vehicle for exposure to battery materials in the burgeoning electric vehicle theme," Zaunscherb concluded.
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Disclosures from Canaccord Genuity, Cobalt 27 Capital Corp., Flash Update, January 2, 2019
Analyst Certification: Each authoring analyst of Canaccord Genuity whose name appears on the front page of this research hereby certifies that (i) the recommendations and opinions expressed in this research accurately reflect the authoring analyst’s personal, independent and objective views about any and all of the designated investments or relevant issuers discussed herein that are within such authoring analyst’s coverage universe and (ii) no part of the authoring analyst’s compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the authoring analyst in the research.
Analysts employed outside the US are not registered as research analysts with FINRA. These analysts may not be associated persons of Canaccord Genuity Inc. and therefore may not be subject to the FINRA Rule 2241 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.
Required Company-Specific Disclosures (as of date of this publication):
Cobalt 27 Capital Corp. currently is, or in the past 12 months was, a client of Canaccord Genuity or its affiliated companies. During this period, Canaccord Genuity or its affiliated companies provided investment banking services to Cobalt 27 Capital Corp.
In the past 12 months, Canaccord Genuity or its affiliated companies have received compensation for Investment Banking services from Cobalt 27 Capital Corp.
In the past 12 months, Canaccord Genuity or any of its affiliated companies have been lead manager, co-lead manager or co-manager of a public offering of securities of Cobalt 27 Capital Corp. or any publicly disclosed offer of securities of Cobalt 27 Capital Corp. or in any related derivatives.
Canaccord Genuity or one or more of its affiliated companies intend to seek or expect to receive compensation for Investment Banking services from Cobalt 27 Capital Corp. in the next three months.
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