/Cobalt 27 faces investor outcry amid accusations it’s selling ‘crown jewel’ assets at a loss

Cobalt 27 faces investor outcry amid accusations it’s selling ‘crown jewel’ assets at a loss

Toronto-based Cobalt 27 Capital Corp., which billed itself as an investment in the electric vehicle revolution, is facing outcries from some of its largest shareholders as it tries to sell its most valuable assets during a market low-point.

The company roared into the market in mid-2017 with an initial public offering, ultimately raising hundreds of millions of dollars to stockpile and acquire royalties on cobalt, an essential metal used in lithium-ion batteries. Within about a year the price of cobalt had hit a five-year peak, only to crash in the latter half of 2018 and never fully recover.

Now the company wants to steer its investors into nickel and to sell its main cobalt assets to its largest shareholder, Pala Investments. Other shareholders would receive $3.57 in cash, plus equity in Nickel 28, a new company that would hold the remaining assets including a stake in a nickel mine in Papua New Guinea.

But with just days left for investors to vote on the deal, several shareholders raised protests that the sale came just as cobalt prices bottomed out, about the executive compensation included in the deal and other issues.

“We do not want to sell an asset today knowing in two years it will be worth more,” said Etienne Guicherd, an investment manager at the Paris-based mutual fund Amiral Gestion, adding his firm owns around three per cent of the shares.

Guicherd said his firm voted no because it invested with a two- to five-year time horizon, knowing electric vehicle adoption could take awhile. He said he believed management used a similar time frame until the sale was announced on June 18.

At the time, cobalt prices had dropped more than 60 per cent from a high in mid-2018 above US$40 per pound to around US$13.

Even though cobalt prices have risen since the deal was announced to US$15.88, according to Infomine, some analysts believe there is still a supply overhang that will keep prices low for months, if not years.

Last month, the proxy advisory firm ISS recommended shareholders approve the deal for immediate cash liquidity, among other reasons.

We do not want to sell an asset today knowing in two years it will be worth more

Etienne Guicherd

“It is also clear that nickel will be an increasingly important part of the battery revolution,” Anthony Milewski, chairman and chief executive of Cobalt 27, said in a press release about the sale.

Reached by telephone, Milewski said he could not provide further comment ahead of next week’s vote.

In the release, he also called it an attractive premium.

Before the sale was announced on June 17, Cobalt 27’s shares traded at $3.47, and had a 20-day volume weighted average of $3.95. The deal offers $3.57 in cash, plus the Nickel 28 shares, which the company valued at $2.18 for a total of $5.75 per share.

Yet the stock traded at only $3.88 at midday Friday.

Several analysts have also panned the price, even while puzzling over the exact value of Nickel 28, which includes an 8.56 per cent stake in the Ramu nickel mine in Papua New Guinea and royalties on undeveloped nickel deposits.

A processing plant at the Ramu nickel mine in Papua New Guinea.

Highlands Pacific, June 2018

Craig Hutchinson, an analyst of TD Bank, wrote on June 20 that it “represents a significant discount to our base-case valuation.”

David Talbot, an analyst at Eight Capital, wrote that Pala would gain ownership of the “cream of the crop” in terms of Cobalt 27’s assets.

“Pala appears to be paying just $304 million in cash for assets valued at $407 million, while largely discarding the rest,” Talbot wrote.

Pala would also reduce its 19 per cent equity stake in Cobalt 27 to 4.9 per cent in Nickel 28, and pay down some of Cobalt 27’s debt.

Earlier this summer, Cobalt 27 said it spent months ensuring Pala was paying a fair price.

Still, on Tuesday, it disclosed that a private streaming company made a non-binding offer of $4 in cash, compared to Pala’s $3.57 offer.

But that deal fell through on Aug. 29. One day earlier, there were media reports that waste from the company’s nickel mine in Papua New Guinea had spilled into Basamuk Bay. Pictures showed a beach covered in a rust-coloured slurry and quotes by the local governor calling for mine closure based on its “poor environmental record.”

Several sources suggested the buyer was Basecore Metals, a 50/50 joint venture between the Ontario Teachers Pension Plan and commodity-trading giant Glencore Plc, which invests in base metal streams and royalties. According to Basecore’s website, the joint venture prioritizes investing in companies with “a strong record of environmental management.”

No one from Basecore was available for comment.

Meanwhile, both nickel and cobalt prices have risen since June. Analysts have cited supply concerns around nickel, worsened by Indonesia’s ban on raw nickel ore exports; and, changing the supply and demand dynamics.

Cobalt prices spiked after Glencore unexpectedly announced in August the shutdown of a mine in the Democratic Republic of Congo.

Simon Dawson/Bloomberg files

These price spikes have only fuelled concern about the deal among some investors.

Bob Mitchell, portfolio manager of the Portland-based Green Metals Energy Fund and one of Cobalt 27’s earliest investors, which once controlled 17 per cent of the shares, said he is voting against the buyout.

He suggested that Cobalt 27 shares always outperformed cobalt during a rising price environment, but not anymore.

In the aftermath of the proposed sale, cobalt has risen as much as 31 per cent, and yet Cobalt 27 shares have fallen six per cent, according to his analysis.

“I think the stock of Cobalt 27 would be higher, but for this transaction,” said Mitchell.

The most vocal of the opposed investors may be Toronto-based Anson Funds, which has declined to state the size of its investment, but issued two press releases, which accuse the company of selling its assets at a loss, to “a related-party.”

I think the stock of Cobalt 27 would be higher, but for this transaction

Bob Mitchell

Anson argues the sale gives Pala the “crown jewel” at a “fire sale” price: Pala would own a stream on Vale’s Voisey’s Bay Mine Expansion in Labrador, planned to start production in 2021, which entitles it to 32.6 per cent of the mine’s cobalt production.

Last June, Cobalt 27 purchased the stream for US$300 million but its value had been written down to US$235 million. Anson claims that Pala is gaining ownership for just US$180 million.

In addition, Pala is also purchasing the company’s 2,904.7 pounds of physical cobalt under the deal, which Cobalt 27 acquired at a cost of $196.1 million, mostly paid in shares.

Cobalt 27 had written down the fair value of the stockpile by more than 50 per cent to $90.9 million.

Pala, according to company filings, was the original source for much of the cobalt and was also where Milewski worked as a managing director at the time that the company launched.

Pala declined to comment for this article.

Anson said it would withhold its votes for management if the deal falls through. The final deadline to vote is Tuesday, Sept. 10, and the company is planning a special meeting for Thursday, Sept. 12.

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