Cobalt 27 Capital Corp. (KBLT:TSX.V; CBLLF:OTC; 27O:FSE) is one of the few avenues for pure-play investment exposure to cobalt, as the company holds an inventory of physical cobalt as well as streaming agreements. The company recently closed a bought-deal offering, selling 8.1 million common shares at CA$10.50 each for gross proceeds of approximately CA$85 million. The exercise of an overallotment option has brought the total gross proceeds to CA$97.8 million.
The company is using those funds to purchase 822 metric tonnes of physical cobalt at an average price of US$36.28 per pound. These purchases bring Cobalt 27's total inventory to about 2,982 metric tonnes of cobalt.
Cobalt, an essential battery ingredient, has had a stellar year, rising about 130% in 2017, and demand is expected to continue to grow.
Cormark Securities analyst MacMurray Whale gave the base case for cobalt in a Dec. 19 initiation report on Cobalt 27: "Cobalt demand is booming from rising EV adoption and need for cobalt in the current battery formulations. Production is constrained: 99% of cobalt is produced as a co-product, two-thirds comes from the politically turbulent DRC and 84% is processed in China. We expect total demand will rise to more than 300,000 t by 2025, driving prices higher."
He also noted that gaining exposure to cobalt is not easy, as "few existing cobalt-producing mines are expanding, and the current cobalt-focused development companies are very early stage, having sizable exposure to other coproducts and arsenic. For this reason, we believe investors should gain exposure to the commodity itself. Cobalt 27 Capital Corp. provides this opportunity with a balanced set of investment risks."
Cormark has a Buy recommendation and CA$13.00 target price on Cobalt 27, noting, "as a holder of almost 3,000 t of physical cobalt metal, KBLT brings immediate exposure to high cobalt prices and expectations for further price increases owing to rising demand from the battery space. Further upside exists through its ownership of net smelter returns."
Analyst Michael Doumet of Scotiabank also discussed cobalt demand in a Dec. 19 report, stating, "we believe higher cobalt prices will be required to incentivize additional mine startups to help feed longer-term demand growth. According to CRU, electric vehicle production will require approximately 100% and 300% of current cobalt production to power batteries in 2025 and 2030, respectively (other uses account for 95%)."
"As automakers look to secure long-term supplies of cobalt, producers (including Glencore) remain reluctant to sign fixed-price agreements. As such, we continue to believe price risk remains to the upside as current 'perfect storm' fundamentals could push prices to levels comparable to its previous peak (~US$50/lb)," Doumet added.
Doumet is bullish on Cobalt 27, writing, "we are increasing our one-year target price to CA$13.25/share [from CA$12.50/share]. Still early days in the KBLT story, we see continued upside in the shares from cobalt price appreciation and value accretive transactions. KBLT is in a unique position as it looks to transform itself from a physical holding company into a hybrid physical/streaming company—and create shareholder value in the process."
That optimism was shared by other analysts. Colin Healey of Haywood Securities wrote on Dec. 19 that the capital raise and cobalt purchase "puts KBLT in a strategically attractive position in the cobalt market and sets the stage for a streaming transaction."
"Management's rationale for the deal was to bolster its balance sheet and liquidity profile prior to enacting on a streaming deal in 2018. Post-deal, we expect the Company to have ~$30M in liquidity and no debt," Healey noted.
The Haywood analyst also stated that cobalt market dynamics "continue to support higher spot prices. . .as EV-based demand continues to rise in the face of supply risk and greater supply-chain scrutiny from end users."
Haywood has increased its target price for Cobalt 27 to $CA14.00 from CA$11.50.
Analyst Jonathan Guy of Numis highlighted that the cobalt price continues to rise "supported by 45% YoY growth in EV registrations in China with the Chinese also now changing the regulations around battery capacity that should favor the battery types that contain cobalt. An average electric vehicle contains between 4kg and 14kg of cobalt with battery demand accounting for approximately 50% of overall demand. With EV take up growing at an exponential rate and only very limited new cobalt supply entering the market we expect the market to tighten further driving prices upward."
Guy also stated that "we expect the KBLT share price to be driven upward by a combination of higher metal prices and the signing of cobalt streams with nickel and copper producers that produce the metal as a by-product."
Guy noted that Numis retains "a Buy recommendation but increase[s] our target price to C$15 (from C$11) driven by our expectation of higher cobalt prices."
GMP Securities raised its target price on Cobalt 27 to CA$13.30 from CA$12.50 on Jan. 3. Analyst Anoop Prihar stated that Cobalt 27's "additional physical cobalt inventory provides a natural hedge against rising long-term cobalt prices."
Prihar also noted that in late 2017, a legal dispute between Gecamines, the DRC's state-owned miner, and Groupe de Terill Lubumbashi has shut down the Big Hill tailings project, taking 4% of global cobalt supply offline. "GTL is now pursuing legal action against Gecamines and the case is scheduled to be contested in court in 2020. As such, GTL's Big Hill furnace could remain shut down until the legal issue is resolved," Prihar stated.
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Disclosures from Cormark Securities, Cobalt 27 Capital Corp., Dec. 19, 2017
Analyst Certification: I, MacMurray D. Whale, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject company(ies) and its (their) securities. I also certify that I have not been, and will not be receiving direct or indirect compensation in exchange for expressing the specific recommendation(s) in this report.
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Disclosures from Scotiabank, Cobalt 27 Capital Corp., Dec. 19, 2017, Intraday Flash
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Important Disclosures on Cobalt 27 Capital Corp.:
Scotia Capital (USA) Inc. or its affiliates has managed or co-managed a public offering in the past 12 months.
Scotia Capital (USA) Inc. or its affiliates has received compensation for investment banking services in the past 12 months.
Within the last 12 months, Scotia Capital Inc. and/or its affiliates have undertaken an underwriting liability with respect to equity or debt securities of, or have provided advice for a fee with respect to, this issuer.
Disclosures from Haywood Securities, Cobalt 27 Capital Corp., Dec. 19, 2017, Research Report
Haywood Securities, or certain of its affiliated companies, may from time to time receive a portion of commissions or other fees derived from the trading or financings conducted by other affiliated companies in the covered security. Haywood analysts are salaried employees who may receive a performance bonus that may be derived, in part, from corporate finance income.
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▪ As of the end of the month immediately preceding this publication either Haywood Securities, Inc., its officers or directors beneficially owned 1% or more of Cobalt 27 Capital Corp. (KBLT-V).
▪ Haywood Securities, Inc. has reviewed lead projects of Cobalt 27 Capital Corp. (KBLT-V) and a portion of the expenses for this travel may have been reimbursed by the issuer.
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Disclosures from Numis, Cobalt 27 Capital Corp., Dec. 28, 2017, Company Update
The research analyst who prepared this research report was Jonathan Guy. The research analysts who prepared this investment recommendation receives compensation based upon various factors (such as the general perception of the analyst's ability and commitment to their analytical work) and upon the overall revenues including the investment banking revenues and trading revenues of Numis and/or one or more of its affiliates.
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