Analyst: Bid to Buy Battery Metals Firm Good Deal for Acquirer

In a June 18 research note, analyst Eric Zaunscherb reported that Canaccord Genuity reduced its target price on Cobalt 27 Capital Corp. (KBLT:TSX.V; CBLLF:OTC; 27O:FSE) by about 68% to CA$5 per share from CA$15.50 due to the proposed acquisition of the company's main assets by Pala Investments and due to the related switch in the basis for valuing the company.

Zaunscherb commented that the deal is a good one for Pala and it is unlikely another entity will make a better offer. Pala agreed to buy 100% of Cobalt 27's issued and outstanding common shares for about CA$501 million. In return, it will gain Cobalt 27's 2,900 tons of refined cobalt metal in bonded warehouses, its cobalt stream on Vale's Voisey's Bay nickel-cobalt mine as of 2021 and its debt.

As part of the arrangement, a newly listed entity called Nickel 28 Capital Corp. will be formed to hold an 8.56% direct participating interest in the operating Ramu nickel-cobalt mine, along with an array of exploration and development project royalties, several minor equity interests and $5 million in cash, noted Zaunscherb.

The current spot price for cobalt is around $15 per pound. In comparison, the cobalt price in Canaccord Genuity's deck is at least $33 per pound, Zaunscherb pointed out, reflecting an expected pricing rebound as artisanal miners in the Democratic Republic of the Congo back off producing at the low prices and as electric vehicle and energy storage system sales increase demand.

With the Cobalt 27 acquisition, Zaunscherb highlighted, "Pala's offer crystalizes this upside at these low levels, and therefore, the financial services firm switched to using the cobalt spot price in its valuation, thus lowering its target price on Cobalt 27 significantly.

"In other words," the analyst explained, "our previous target captured the impact of a rebound in cobalt prices over the next 12 months while the revised target reflects cash in hand plus the stub shareholding in a nickel vehicle."

Despite the reduced target price, Canaccord Genuity maintains its Speculative Buy rating on Cobalt 27, which "reflects a 15% projected return and the slim outside chance of an alternative bid surfacing," Zaunscherb noted.

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Disclosures from Canaccord Genuity, Cobalt 27 Capital Corp., June 18, 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.

The authoring analysts who are responsible for the preparation of this research have received (or will receive) compensation based upon (among other factors) the Investment Banking revenues and general profits of Canaccord Genuity. However, such authoring analysts have not received, and will not receive, compensation that is directly based upon or linked to one or more specific Investment Banking activities, or to recommendations contained in the research.

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.

Disclosures are available here.