Target Prices Raised on Cobalt Pure-Play After Major Royalty Acquisition

Analyst Anoop Prihar with GMP Securities, in a Feb. 22 research note, reported that Cobalt 27 Capital Corp. (KBLT:TSX.V; CBLLF:OTC; 27O:FSE) acquired from a third party a 1.75% net smelter return royalty (NSR) on all metals (nickel, cobalt, platinum and palladium) produced at the Dumont project in Quebec's Abitibi region.

The terms of the deal were not made public, yet Cobalt 27 indicated it is funding it with the cash it has on hand, which was $14.1 million as of Oct. 31, 2017, Prihar indicated.

As for the project, Dumont is fully permitted and production could start in 2021. It is anticipated project financing will be obtained this year, following which construction could ensue, likely taking about two years to complete.

The mine plan in a 2013 definitive feasibility study outlined initial production of 33,000 tons per year (33 Kt/year) of nickel and 1 Kt/year of cobalt, a total capex of $1.2 billion and a mine life of 33 years. Prihar commented, "There is also production upside potential, increasing production of nickel to 51 Kt/year and cobalt to 2 Kt/year after five years for an incremental capex of approximately $900M."

The Dumont joint venture is owned by RNC Minerals Corp. and a private equity firm, Waterton Global Resource Management.

GMP values the Dumont NSR at "an estimated book value of $10M," but will re-evaluate it once project financing is in place, Prihar said. He reiterated GMP's CA$13.30 per share target price on Cobalt 27.

Analyst Craig Hutchison indicated in a Feb. 23 research report that TD Securities Inc. was assuming coverage of Cobalt 27 following the Dumont royalty acquisition and increased its target price on the company to $17 from $16 per share. Noting that the transaction was the first of its kind for the company following its initial public offering, Hutchison added that it "is consistent with its strategy to acquire royalties and streams on cobalt-related assets in established, stable mining districts."

The transaction price was not disclosed. However, one could derive an "undiscounted value of $70M" for the royalty from the buyback provision in the agreement, concluded Hutchison. That would allow the Dumont joint venture owners to repurchase 0.375% of the NSR for $15M.

Using a 12% discount rate for under-coverage base metals developers, Hutchison calculated a $43.4 million net present value for the Dumont royalty.

"Cobalt 27 remains, in our view, the best way in the TD coverage universe for investors to get pure-play cobalt exposure as part of the broader trend of increasing electric vehicle adoption without traditional mining or development-related project risks," opined Hutchison.

Cormark Securities Inc. also raised its target price on Cobalt 27, to $16.30 from $14.50, after incorporating the NSR royalty into its company model, wrote MacMurray Whale in a Feb. 27 research piece. As public records suggest, the cobalt firm transacted this deal for under $15M, the analyst concluded, "We believe it paid a reasonable amount in line with the original investor in the NSR royalty."

Whale provided several details about the NSR royalty. For one, its duration is for 60 years, at which time it renews for the same amount of time. Upon onset of production at Dumont, the royalty is to be paid quarterly in U.S. dollars, "providing Cobalt 27 with cash flow over the 33-year initial life of mine," Whale explained.

He also described Dumont, noting it is advanced to where it could "deliver nickel and cobalt to the market by 2020." With a 1.18 billion ton reserve, containing 3.15 million tons of nickel and 126 Kt of cobalt, the project is the "fifth largest nickel sulphide discovery and globally, the second largest nickel reserve and largest undeveloped cobalt reserve." Further, Whale pointed out that Dumont "is ideal for producing nickel and cobalt material feedstock" for sale directly to the battery industry. This is significant in that roughly only half of global nickel mine supply is "suitable" for inclusion in batteries.

The positives of the Dumont project are its large resource, existing infrastructure (road, rail, power and water) and that it's fully permitted and in a mining-friendly jurisdiction. The downside is the "large capex relative to the market cap of the developer," Whale said. However, RNC Minerals is currently updating the feasibility study which, with an increased internal rate of return and higher cobalt prices, "could be a catalyst to move the project toward financing."

GMP, TD Securities and Cormark all have a Buy rating on Cobalt 27. Its stock is currently trading at around $12.35 per share.

BMO Capital Markets rates Cobalt 27 an Outperform and raised its target price to $17.50. Analyst Andrew Mikitchook noted in a Feb. 22 report that the Dumont property "represents one of the largest undeveloped nickel reserves and the largest undeveloped cobalt reserve globally."

"Mine life extensions up to an additional 30 years are possible from resources not included in the current mine plan. Dumont is located in a modern mining friendly jurisdiction west of Amos, Quebec, with access to modern infrastructure including rail and power," the analyst stated.

Looking ahead, Mikitchook noted that Cobalt 27 is "pursuing streaming deals from mining companies that produce cobalt as a by-product and we expect finalization of the first such deal within 2018."