Cobalt 27 producing cash after cobalt selloff

Cobalt 27 Capital Corp. [KBLT-TSXV; 270-FSE], owner of the world’s largest stockpile of cobalt, has completed a previously announced friendly acquisition of Australian Securities Exchange-listed Highlands Pacific Ltd. [HIG-ASX], a move that enables Cobalt 27 to begin generating cash flow.

Initiating cash flow has been a primary objective of the company since its IPO.

However, closing of the $96 million transaction follows a dramatic selloff in the past 12 months that has seen the price of cobalt plunge to US $17 a pound from a recent peak of US $44 a pound. Analysts attributed the drop in price to an unexpected supply side response to higher prices.

The Democratic Republic of Congo (DRC) proved to be a major swing producer as large miners, such as Glencore AG (the Swiss metals trader) and Eurasian Resource Group (ERG), as well as artisanal miners ramped up production.

“On the whole, cobalt production from the DRC increased more than 40% in 2018 – and global supply outstripped demand,” said Scotiabank in a report. However, at US $17 a pound, cobalt prices are 16% below the 10-year average price, and at current levels, miners have been reducing production,” Scotiabank added.

“Meanwhile, electric vehicle adoption continues to expand rapidly and over the next decade, will necessitate two or three times the current global production to service demand.”

Scotiabank went on to say that demand projections for cobalt are still expected to exceed production levels from the ramp up of large projects in the DRC as well as other various projects.

Meanwhile, Cobalt 27 shares rose 9.75% or 39 cents to $4.39 on Tuesday. The shares are trading in a 52-week range of $3.27 and $12.49.

Cobalt 27 has established itself as an investment vehicle that offers exposure to the metals that are key to the production of electric vehicles and battery energy storage. It recently acquired a cobalt stream on the Voisey’s Bay nickel mine in Labrador.

The announcement of the Highlands acquisition in January 2019 came nearly eight months after Cobalt 27 said it had agreed to acquire a stream of over 55% and 27.5% of Highland’s attributable share of cobalt and nickel production, respectively, from the Ramu mine in exchange for a $145 million upfront deposit.

Highlands’ primary assets include an 8.56% stake in the producing Ramu mine and a 20% interest in the Frieda River copper-gold project. Both are located in Papua New Guinea.

Ramu is a large scale nickel-cobalt mine with estimated reserves of one billion pounds of nickel and 100 million pounds of cobalt. Ramu exceeded annual production projections in 2017, reporting net cash flow of US$170 million on production of 34,666 tonnes of contained nickel and 3,308 tonnes of contained cobalt.

Ramu produces 3% of annual global mined cobalt as a by-product. It has an estimated mine life of 30 years.

Following repayment of Highland’s attributable Ramu construction and development loans, Highlands’ ownership in Ramu would increase to 11.3%.

“The acquisition of Highlands will allow Cobalt 27 to gain a direct interest in the Ramu nickel-cobalt mine and materially increase its attributable exposure to the mine’s nickel production from 27.5% to 100% and cobalt exposure from 55% to 100%, relative to the previously announced Ramu cobalt-nickel stream,” said Cobalt 27 Chairman and CEO Anthony Milewski.

“It also brings cash flow to our business, something we have told our shareholders was important from the beginning.”